Covered call alternatives?

[eaglefeather]

Greetings,

I use a buy/write aka covered call in one of my multi-legged strategies. Lately, I've been looking into some way to substitute the stock position in order to conserve capital. Two strategies seem to be commonly known:
1) Poor Man's covered calls using ITM LEAPS.
2) Selling a call credit spread and purchasing just enough stock to zero the delta.

The problem is that with my strategy I need the 100 delta by owning the stock to sell for a profit when the stock blows past the strike side of the short call. And I need to delay taking a loss when the stock goes down (by holding the stock versus having an expiration).

1) Poor Man's covered calls using ITM LEAPS just doesn't seem to work due to the large spread, and theta decay seems to eat you up.
2) Selling an OTM call credit spread (or the mirrored put debit spread) and buying a fraction of the lot, I like this strategy the best, as it requires less capital than owning a lot (100 shares) for every call sold.

I was wondering if anyone else had ideas, or had travelled this route before?

The goal is to mimic the profit graph of the covered call short term, use less capital, and delay taking a theoretical loss on a position for at least the period of a LEAP (6 mos to 1year) if the stock goes down in price.

 

[lx008]

maybe you can have some brokers to design an OTC contract to fit your need

 

[viruscore1]

If your market sentiment is neutral or slightly bullish on the underlying stock, checkout otm put credit spread.

 

[2rosy]

sell puts

 

[spindr0]

The Poor Man's Covered Call with a high delta LEAP will reduce your capital and lower your risk. The problem is that the deeper ITM it is, the wider the spread. To diminish that, either (1) you have to work the order and hope for a better fill and, (2) for many stocks, look at a deep ITM call at a higher delta (narrower spread), but not so high that the time premium starts to become too much of an obstacle to overcome. Then, you have to find an OTM strike to sell that offers enough premium to offset as well as avoid locking in a loss. It will cost a coupla months of writes to cover the extrinsic cost of the LEAP. That's the trade off.

I understand your second suggestion but I don't get it in context of as a substitute for a covered call. The two risk graphs are in no way similar - the CC is bullish and the delta adjusted call credit spread is bearish. Given you are buying a delta equivalent in shares, you are adding a downside loss potential after you exhaust the premium received. That's the trade off for reducing the loss potential of the call spread up to the short strike.

Since a LEAP is one year out, or more, it almost meets your requirement of delaying taking a loss on a position for 6 mos to 1year. There will be very little theta decay in the early months. A 2 year LEAP would be more suitable for your delay criteria and would have very little decay for a year or more as compared to what happens in the last few months before expiration.

If successful in your writing, the monthly (?) premiums received would far outweigh the theta decay of your LEAP. And if it works out and your print money for 6 months against a 1 year LEAP (or longer for a 2 year LEAP), at some point you could roll out your LEAP in order to avoid the increasing rate of theta decay as you get into the later months.

The general rule of thimb is that to get something, you have to give up something. Less risks usually means giving up some reward, and vice versa.

If you want to limit the risk and capital, consider KISS and just sell OTM credit spreads.

 

[tommcginnis]

The goal is to mimic the profit graph of the covered call short term...

Well, here's a big for the simply fact of putting a profit chart together to examine your choices -- it's all there, if we can just get the idea of taking things (like PnL graphs) apart, seeing how they're put together (as with just 4 pieces of puts+calls/long+short), and seeing how else those pieces can be used. If you're steered by that chart, rather than the names and jargon that gets pulled out (to put this old, old whine into new bottles ), your trading will be much more flexible, and much more responsive as the markets change over time. So, way big .....!

 

[traderlux]

good to see you back spindro, I think the OP talking about his 2nd alternative, meant that just for the stock part of a covered call equivalent, does that make sense?

 

[spindr0]

Hey traderlux. And here I thought that the only one who missed me was my parole officer :->)

I don't have any predisposition against the delta hedged vertical other than it's bearish whereas the CC is bullish. Apples and oranges. If he flipped the position and sold an ITM put credit spread (with hedge), then there'd be some basic level of comparison even tho the risk graphs are quite different - the 2nd behaves somewhat like a ratio write in the middle and like a long put on the wings. Given that, I'm not really sure what makes sense so I suppose we'll have to wait for the OP to clarify.

 

[eaglefeather]

Sorry I mis-stated. Slighty OTM call credit spread mirrors a slightly ITM put debit spread, same strikes. Similar to a CC, but has a downward hook toward the break even on the furthest strike.

I was thinking this morning about a calendar spread using the LEAP for the long option, and then buying equivalent shares to zero the delta, so for an ATM example, might be like 30 to 50 shares depending. But my gut tells me I need to sell some premium somewhere and gain back some theta.