Market Measures

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Covered Calls in Oil Stocks

Market Measures

For today’s segment of Market Measures, Tom and Tony provide some interesting alternatives to the Covered Call. They look to see which bullish strategies-- buying stock, covered calls or the Poor Man’s Covered Call-- produces the best results.

A "Poor Man’s Covered Call" is a Long Call Diagonal Debit Spread that is used to replicate a Covered Call position. The strategy gets its name from the reduced risk and capital requirement relative to a standard covered call.

Study:
  • Compared:
    -Long Stock
    -Covered Call: 30 delta 45 DTE
    -PMCC: 70/30 delta 105/45 DTE
  • All data was 2006 to present in XOP

If you are not familiar with XOP, it is an ETF with 63 companies in oil & gas exploration and production and oil & gas refining and marketing. XOP has been down money over ten years, even when considering the dividend.

Results:

While the profit is negligible, the poor man’s covered call does not lose money as the long stock did. In a bullish environment, the potential for profit can be much higher. Replacing the long stock with options increased the success rate and produced a profit even when the stock remained flat.

Tune in for a full breakdown of the results and Tom and Tony's preferred strategy in this asset class!

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