I completely agree. Though I prefer to do it as a diagonal, but only go out a couple of weeks longer with the long call. It's smoother ride.
Poor Man's Covered Call; just an simple explanation please
- Thread starter klattermusen
- Start date
I completely agree. Though I prefer to do it as a diagonal, but only go out a couple of weeks longer with the long call. It's smoother ride.
No insult taken. I'm here to learn.
I thought the purpose of this strategy was to pick the highest to 1 call delta strike. So deep ITM. I also thought that the advantage of +2 yr leaps was that you could smooth out events short term like bad earnings while still collecting your near term covered calls. Now it's being suggested that you should skip the whole long term leaps entirely....consider the calls only one month out or so....but again the risk seems higher to me there due to possibility of an occasional short crappy event. That makes me ask why then this Poor man time spread is mainly recommended to be used with the longggg leaps....
and taowave...I find the Vega using my IB options screener. It tells me my Jun 17 2022 $1500 call strike delta is .91 with a mid of $810. That takes me to a price of $2310 and while we speak the common is approx $2263... What other elements do I need to consider in managing my risk.
What I want is a the lower risk approach to collecting covered call premiums ~ and I believed that was more sensible going after the leaps as my basepoint.
Last edited:
I was still operating under the 1/2023 leap position...
That has a vega of somewhere around 7 bucks..
I only have data for the 1 year 95 delta call,and that has traded as low as 21 vol over the last 5 years.It also got up to 66..
My advice to you is if you are going to trade,have some sort of plan.Know if vol is cheap or expensive,know an apx percentile of where it is trading.Whats you expected profit,is there an edge,and where do you cry uncle..Bare minimum,have some idea of what your risk reward is.
That has a vega of somewhere around 7 bucks..
I only have data for the 1 year 95 delta call,and that has traded as low as 21 vol over the last 5 years.It also got up to 66..
My advice to you is if you are going to trade,have some sort of plan.Know if vol is cheap or expensive,know an apx percentile of where it is trading.Whats you expected profit,is there an edge,and where do you cry uncle..Bare minimum,have some idea of what your risk reward is.
Well, you were trying to create a diagonal spread that has a P&L curve similar to a covered call, and you've done that. And, probably when you're thinking about covered calls you're concerned about delta and theta of the short contract. Which is good.
With Diagonals, and because you've got such a long dated long call, you've got a lot of time premium. You probably have considered it in terms of Delta and Theta, but you also need to look at it in terms of Vega (as a retail trader you can pretty much ignore gamma and rho).
The best time to put this trade on would be when IV is low and/or when you think IV will go up.
You could do this with shorter dated contracts (my preference), but then the P&L curves will stop looking like a covered call, and will be more like lopsided triangles and curves with the right tail kicked out.
No problem, and no big disaster, just part of the learning curve.
With Diagonals, and because you've got such a long dated long call, you've got a lot of time premium. You probably have considered it in terms of Delta and Theta, but you also need to look at it in terms of Vega (as a retail trader you can pretty much ignore gamma and rho).
The best time to put this trade on would be when IV is low and/or when you think IV will go up.
You could do this with shorter dated contracts (my preference), but then the P&L curves will stop looking like a covered call, and will be more like lopsided triangles and curves with the right tail kicked out.
No problem, and no big disaster, just part of the learning curve.
Comparison: (if stock is unchanged @ 2300 end of Apr. 30)
Example #1: Leap + short call
Jan 2023 1600 Call + short Apr 30 2400 Call
$76,000 investment and $2300 profit minus $400 (time decay) = $1900 profit
Example #2: Apr 30 Call Spread
Apr 30 2100/2400 Call spread
$18,000 investment and $2000 profit
Summary:
#1: $76K investment with $1900 profit
#2: $18K investment with $2000 profit
This is a comparison of using the leap vs. using the near-term call spread.
I prefer #2. Use the spare $58K for other trades. Enter similar trade next month if you want this to be a long-term position.
Jeff82 suggestion of a diagonal would be similar.
Using the greeks/IV can help with timing to get a better price but not completely necessary IMO. More important is where you think the stock is going.
Example #1: Leap + short call
Jan 2023 1600 Call + short Apr 30 2400 Call
$76,000 investment and $2300 profit minus $400 (time decay) = $1900 profit
Example #2: Apr 30 Call Spread
Apr 30 2100/2400 Call spread
$18,000 investment and $2000 profit
Summary:
#1: $76K investment with $1900 profit
#2: $18K investment with $2000 profit
This is a comparison of using the leap vs. using the near-term call spread.
I prefer #2. Use the spare $58K for other trades. Enter similar trade next month if you want this to be a long-term position.
Jeff82 suggestion of a diagonal would be similar.
Using the greeks/IV can help with timing to get a better price but not completely necessary IMO. More important is where you think the stock is going.
No you are NOT an owner of any shares, not even synthetically. Call option gives you the RIGHT to be an owner of the stock but NOT the guaranteed eventuality. You only become an owner of 100 shares of the underlying IF you CHOSE to become one. So right now you are just an owner of an option contract based on the underlying and that's it.
If you have sold the April 30th 2400 call, yes. And yes and no, because the option is what's called an American option so the call can be exercised against at any time before April 30th. If the price rises significantly above 2400 before April 30th, the people who bought the call can still choose to exercise their option to buy the shares from you at $2400 any time before or on April 30th. So you are not "safe" in collecting the full $2300 credit.
See my answer above. So as long as you don't have shares physically with you, your short call is not considered covered.
It's the break-even value for exercising. This is how much the price of the underlying would have to rise to in order for you to at least break even on your call option if you ever want to exercise the option. Theoretically, it's the intrinsic value + time value of the option.
You need to read more on options. I suggest investopedia.com. They have some excellent articles and tutorials that provide pretty comprehensive education on options.