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Covered Calls for the frugal

Covered calls and synthetic calls are the same things – really. It’s like a generic vs name brand drug – the difference is the price. Traders can synthetically replicate a covered call position using options, while dramatically reducing the required capital. This has you put up a lot less capital – like a generic drug.

Like a covered call, a poor man’s covered call is an inherently bullish strategy. One strategy is to use a LEAPS contract with an expiration date of around 1-2 years. Look for an in-the-money call strike with a delta of around 0.80. After purchasing a LEAPS call option, then sell calls against the LEAPS.

When would you trade a Poor Man’s Covered Call? When you don’t have or want to buy shares of the underlying stock.

When do you trade a covered call? When you expect the stock to stay above the current price and move slightly higher.

Instead of buying a stock, you would purchase a deep-in-the-money call option at a later expiration.

Using this method, look for an expiration cycle with around 30-60 days left until expiration and then aim for selling a strike with a delta ranging from 20 to 40, or a probability of success between 60% to 85%.

To make these trades, you must have volume and liquidity at each strike. You will also need to manage these trades more often and you give up the dividend of the stock if any.

All examples below are from Tasty Trade research.

Synthetic covered call – Sell ATM put, buy ATM call, sell 30 delta call.

Here is an example:

Looking at the win rate and average P&L, looking over the past 15 years, these are the results. Most points are the same other than buying power reduction and Return on Capital (ROC).

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