The poor man’s covered call is a great alternative to covered call because it uses less buying power. In a tastybites account, it is essential to efficiently use buying power.
A poor man's covered call utilizes a further out in time deep in the money call option as a replacement for long stock, while the short call remains the same as in a regular covered call.
Here are key components of a poor man's covered call:
- Buy call option in a longer-term expiration cycle
- Sell call option in a near-term expiration cycle
- Max profit is slightly less than: Short Strike - Stock Price + Credit from short call
The buying power reduction of a poor man’s covered call is 84% less than a standard covered call, but the tradeoff is less theta decay and roughly 12% lower max profit.