loader image

How to Make Money With a ‘Poor Man’s Covered Call’

by | Dec 21, 2023

Celeste is showing everyone how to take advantage of “tax-loss harvesting” at 1 p.m. ET on Friday — learn the best stocks to buy in January!

Dear Fellow Trader, 

If you’re an investor, one of the best ways to generate income on existing positions is through covered calls. This consists of owning 100 shares of a stock, and then selling a call on top of an existing position. If the share price pushes past the strike price on or before the expiration date, the buyer may execute the option, take the shares, and you pocket the underlying gains and the option premium.

But sometimes, investors don’t have the necessary capital to build a stake in 100 shares of a stock. But they can look to generate similar returns to the covered call position with another strategy… 

So today, we’ll discuss the Poor Man’s Covered Call.

Same Results, Less Capital?

A “poor man’s covered call” is a trading strategy that mimics the payoffs of a covered call, but at a lower cost. 

You don’t need to own 100 shares and sell a call against it. 

Instead, you can own a long call option on a stock, and sell calls with nearer-term strike prices. This is important. By taking a long-term position using calls, you don’t need the full amount of capital to own the stock. 

So, if a stock costs $51 per share, you’d need $5,100 for 100 shares. 

But you may be able to go out 120 days and purchase a call with a $50.00 strike price for $6.00. 

From here, you can go out 90 days and sell a call at a slightly higher strike price. Let’s say you sell a call that is out of the money at $56 for $2.00. 

This long, in-the-money call option gives you the right to buy 100 shares of the company at $50 per share at any time before the option expires.

By selling the call option, you are obligated to sell the 100 shares of the stock at $56 if the buyer wants the stock.

The net cost of this strategy is the $6.00 paid minus the $2.00 generated in the sale. So, this trade costs $4.00 x 100.

Or $400. 

Let’s look at a few outcomes. 

First, the stock remains under $55.00 at the time the call you sold expires, the trade is not over. Remember, you still own the $55 call, which means you keep the premium generated from your sale, but you can again sell another call on top of the underlying position for expiration in the same month as the call you own. 

If the stock remains under $56, you would pocket the premium, plus the difference between $54 and $56. That means the most you can make is $400 on this trade.

And if the stock goes above $56.00, you would execute the option to take possession of the underlying stock, and then sell the stock to the option buyers. While the execution of the option limits your gains on the underlying $50 call, it will allow you to offset any small losses and collect gains from your original position.

Let’s take a look at some of the numbers with a real scenario. 

You want to trade Intel Corp. (Nasdaq: INTC). So, you buy the $40 call for April 19, 2024, for $8.57. This contract is in the money, with a breakeven price of $48.57 for expiration.

You then sell the Intel February 2024 monthly expiration, $48 strike call (out of the money) for $2.42. 

Your breakeven on this trade is now $45.06 since you will pocket the premium generated on this trade. Given that INTC traded at $46.87 on Thursday, this trade offers you downside protection against any selling in the market. This means you have a defensive stance — and a probability of profit now at 62%. 

Your maximum upside comes if the stock never goes above $48, but you can generate a very nice gain on the underlying $615 position up until the maximum cap price of $50.42. Below, you’ll see the total gains that can be generated based on the price action over the next few months. 

Best of all, if the stock never goes above $48, your contract for $40 remains in play, while the other contract you sold is worthless. This means you can sell ANOTHER call with the same strike price as the underlying position to maximize your returns, or just hold the underlying call until expiration for maximum upside. 

This is a great conservative strategy that any trader can tackle.

Chat soon,

Garrett signature



Garrett Baldwin

*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk. 

P.S. Why Next Week Is Setting Up Some of the Biggest Trading Opportunities of 2024

The last week of the year is typically when Wall Street seeks to apply “window dressing” to its positions heading into the final closing bell.

“Window dressing” is a practice where institutional investors eliminate their losers in order to make their year-end reports look more attractive.

It’s called “tax-loss harvesting.” 

And trading veteran Celeste Lindman says this creates some of the biggest trading opportunities of the new year.

That’s because when the markets open back up for the new year, institutional investors will be looking to reinvest this capital in the stocks they just dumped.

Celeste is going live at 1 p.m. ET on Friday, Dec. 22 to show you how to identify exactly which stocks could soar when Wall Street piles back into the market in January.

Register Your Spot for the Free Class Here!

WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

What to read next

Have any questions? Contact Our Customer Service Team

Share via
Copy link