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Variations of Covered Calls

Strategies for IRA

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

A strategy often used is the Covered Call. Our goal when selling option premium in the out-of-the-money (OTM) call is to reduce our cost basis while simultaneously increasing our probability of profit (POP). Are there strategies that can mimic the covered call in an IRA account?

One substitute is a Short Put. This must be cash-secured in an IRA account, meaning the money is in the account to buy the stock at the strike price. It has a higher POP than a Covered Call. Another strategy is a Diagonal Spread. One variety of this strategy is even sometimes referred to as a Poor Man’s Covered Call. It’s formed by purchasing an in-the-money (ITM) call with an expiration farther out in time while selling an OTM call with fewer days to expiration (DTE). The margin is much lower compared to strategies that buy stock or sell cash-secured puts.

Traders who are long less than 100 shares of stock can mimic the covered call strategy by selling a Vertical Call Spread. This idea was a concept JJ Kinahan introduced in a segment of Closing the Gap. Another strategy that JJ discussed was the Covered Strangle, which is the combination of long stock and a short Strangle. This both increases the overall downside risk while taking in more premium for taking that risk.

Additional segments on using call spreads when you are long less than 100 shares:

For More on Covered Call alternatives see:

Watch this segment of “Strategies For Your IRA” with Tom Sosnoff and Tony Battista for the important takeaways and a better understanding of the variations of Covered Calls.

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