Poor Man's Covered Call; just an simple explanation please

klattermusen

klattermusen

Ok. I understand the broad strokes. Can someone help with this example.

If I'm buying GOOGL calls Jan 2023.

The 1600 call strike is 760. Delta is about .89

I buy 1 call strike lets say.

Now I'm a poor owner of GOOGL 100 shares synthetically.

The april 30th 2400 call is $23

1) I'm "safe" in collecting the full $2300 credit as as long as GOOGL does not expire above 2400 by april 30th...?

2) I can rinse and repeat over the next several months assuming a perfect world.....apart from unforeseen black swan events....what should I watch out for in PMCC management....

3) is there any importance about the $2360 number? my 1600 call + 760 price of the call = 2360? I'm just freebasing ideas here...thanks for patience.
 
You can rinse and repeat,but the 4/30 2400 call is high due to earnings..

Dont expect to get that vol post earnings




klattermusen said:
Ok. I understand the broad strokes. Can someone help with this example.

If I'm buying GOOGL calls Jan 2023.

The 1600 call strike is 760. Delta is about .89

I buy 1 call strike lets say.

Now I'm a poor owner of GOOGL 100 shares synthetically.

The april 30th 2400 call is $23

1) I'm "safe" in collecting the full $2300 credit as as long as GOOGL does not expire above 2400 by april 30th...?

2) I can rinse and repeat over the next several months assuming a perfect world.....apart from unforeseen black swan events....what should I watch out for in PMCC management....

3) is there any importance about the $2360 number? my 1600 call + 760 price of the call = 2360? I'm just freebasing ideas here...thanks for patience.
More...
 
klattermusen said:
3) is there any importance about the $2360 number? my 1600 call + 760 price of the call = 2360?
More...

With the current price of GOOG around 2302, you're essentially buying GOOG at 2360 rather than 2302 so you need to collect 58 in your call selling prior to Jan 2023 to cover the premium you're paying for the 1600 call.

***BTW, that "poor man's" call you're buying will cost you $76,000 so you better be an upper-class poor man. :-)
***This method works better for lower-priced stocks if account size is limited.
 
BKR88 said:
With the current price of GOOG around 2302, you're essentially buying GOOG at 2360 rather than 2302 so you need to collect 58 in your call selling prior to Jan 2023 to cover the premium you're paying for the 1600 call.

***BTW, that "poor man's" call you're buying will cost you $76,000 so you better be an upper-class poor man. :)
***This method works better for lower-priced stocks if account size is limited.
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hey thank you - that extra $58 I need to collect in the call....that would be approx a +$5800 in added credit before I actually start earning out of the -58 on the covers?
 
By going out so long on the long call you're taking on a lot of vega risk, especially when buying it going into earnings. The IV doesn't look too bad based on 2020, but if you look at pre-COVID it might be.

I know you're trying to minimize theta decay on the long contract, but you might consider using nearer term strikes in the future.

Otherwise, it looks good.
 
klattermusen said:
hey thank you - that extra $58 I need to collect in the call....that would be approx a +$5800 in added credit before I actually start earning out of the -58 on the covers?
More...

Yes, $5800 but you've got a long time to collect the 58.
You could close your long-dated call prior to Jan 2023 so some of that 58 will still be in the call when you sell it so you won't lose all the premium you're paying for unless you hold till expiration.
If you sell the Apr 30 call for 23 and GOOG price stays around 2300 by Apr 30 you'll keep the 23 but you'll likely lose around 4 in the long call (premium decay) so still have a profit of 19 ($1900). (4 loss in premium is a guess as volatility will play a factor)

***Just had a quick peek at the options.
I'd prefer to be long the Apr 30 2100 Call rather than Jan 2023 1600 Call.
208 (2100 Call) - 28 (2400 Call) = 180 ($18,000)
$18,000 investment rather than $76,000 investment.
6 in premium lost compared to 4 but much smaller investment.
If the stock drops loss will be slightly more as delta is nearly 1 but profit will be slightly more if stock rises.
If you want to be in for the long-run, keep repeating this each month.
 
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BKR88 said:
Yes, $5800 but you've got a long time to collect the 58.
You could close your long-dated call prior to Jan 2023 so some of that 58 will still be in the call when you sell it so you won't lose all the premium you're paying for unless you hold till expiration.
If you sell the Apr 30 call for 23 and GOOG price stays around 2300 by Apr 30 you'll keep the 23 but you'll likely lose around 4 in the long call (premium decay) so still have a profit of 19 ($1900). (4 loss in premium is a guess as volatility will play a factor)

***Just had a quick peek at the options.
I'd prefer to be long the Apr 30 2100 Call rather than Jan 2023 1600 Call.
208 (2100 Call) - 28 (2400 Call) = 180 ($18,000)
$18,000 investment rather than $76,000 investment.
6 in premium lost compared to 4 but much smaller investment.
If the stock drops loss will be slightly more as delta is nearly 1 but profit will be slightly more if stock rises.
If you want to be in for the long-run, keep repeating this each month.
More...

Thanks again. "I'd prefer to be long the Apr 30 2100 Call" you mean the one that expires in 12 days? I thought the point of a pmcc was to get as close t 1.0 delta leaps as pssible.

and When you say "If you want to be in for the long-run, keep repeating this each month." ... repeating which part? Rolling the leap into a later date every month or shorting the reg end of the month calls based on which leap? thanks
 
klattermusen said:
Thanks again. "I'd prefer to be long the Apr 30 2100 Call" you mean the one that expires in 12 days? I thought the point of a pmcc was to get as close t 1.0 delta leaps as pssible.

and When you say "If you want to be in for the long-run, keep repeating this each month." ... repeating which part? Rolling the leap into a later date every month or shorting the reg end of the month calls based on which leap? thanks
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Your Jan 2023 call had a delta of .89
The Apr 30 call (2100) has a delta near 1(closer than .89).
Purpose of getting delta close to 1 is so it acts just like owning the stock but costs much less.
Don't use leaps at all, just keep buying a call in the month you want to sell a call.
So buy the Apr 30 2100/2400 Call spread.
When it expires do the same thing in the next month if you want to stay in for the long-term.
 
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