Good morning – I’m here with Andy Crowder to discuss a relatively new and little-known options trade known as the “Poor Man’s Covered Call.”
This simple income strategy could deliver consistent income every month – and it’s great for folks with big and small accounts.
Today I just wanted to have Andy explain what this trade is all about – what it accomplishes and how it can perform.
So I sat down with Andy to ask him.
IAN: Andy, thanks for taking the time to chat about Poor Man’s Covered Calls. I’ve sold calls in my portfolio in the past and as an options strategy, it’s one of my favorites. How is the Poor Man’s Covered Call different?
ANDY: Thanks for having this Q&A. First off, I guess I should clarify what the name is about.
Since you’ve sold covered calls in the past, you know that in order to do so, you have to own 100 shares per covered call sold. That can add up to a significant amount of capital tied up in shares. For instance, Microsoft sells for around $73/share. Multiply that by 100, and you need to invest at least $7,300 in Microsoft stock in order to sell covered calls.
That lets you sell just one covered call. If you wanted to sell two, you’d need to invest $14,600 in the stock.
If you already own the shares, that’s fine. But if you don’t own shares and you want to generate income from what I consider to be the safest and best long-term options strategy, then you’re putting up a ton of up-front capital.
For people getting started with options, it can be a real road block.
IAN: Yeah, I guess I’ve rarely ever used a covered call strategy for this very reason. It’s a lot of up-front money – so how does this Poor Man’s version work differently?
ANDY: Well, instead of buying the shares, we can buy a long-dated (at least a year out, typically longer), in-the-money call that gives us the SAME EXACT exposure to 100-blocks of shares, for a significant discount.
My exclusive training will show you how with three real-time trades. Go here to confirm your spot.
IAN: I know the first time I heard this explanation of Poor Man’s Covered Calls, I was confused.
Here’s what I understand: I buy a call that’s in the money (below the current price of stock) and it gives me a kind of artificial ownership of 100 shares of stock for the next year until expiration. And it costs me less than buying shares outright?
ANDY: Yes. You can control the same 100 block of shares via the long-dated call position or LEAPS – usually for a 60% to 85% discount.
So, to control 100 shares of Microsoft, you could pay $7,300 to buy 100 shares of stock. Or you could pay $2,000, minus the premium or income you bring in selling the short-duration calls.
IAN: So then, I have this long-dated call or LEAPS contract and then I can sell out of the money calls against it, as if I were covered?
ANDY: Yes, and here’s the neat thing . . . Gains in the LEAPS contract more than offset any losses we see if the short-dated call pushes through our strike price.
We also benefit if the stock goes down in price because our short call will expire worthless. And the premium we bring in is typically much, much larger than the average company’s annual dividend . . . every four to six weeks.
IAN: OK I think we’re getting a little too “down the rabbit hole.” Just give me some numbers on this options trade. What kind of gains can I realistically expect from a Poor Man’s Covered Call trade on an annual basis?
ANDY: Well, for one example, I’ve been selling Poor Man’s Covered Calls on Wal-Mart Stores (NYSE: WMT) since January 2016. The stock itself is up 20% – but our Poor Man’s Covered Call total return is over 75%. That includes a mix of income and unrealized capital gains.
IAN: Show us how this works.
ANDY: I bought the January 2018 $45 call for $1,510. That $1,510 gives me synthetic control of 100 shares of Wal-Mart. If I had simply bought 100 shares, it would have cost me $5,885. So, I’m basically getting the upside of WMT for a 74% discount in this options trade.
And I’ve been selling calls against this long-dated call every four to six weeks since January 2016. I hesitate to even mention this part … but we’ve lost $10 selling the calls. However, it doesn’t matter because our LEAPS have almost doubled in price.
IAN: Our readers can go here now to RSVP (it’s FREE to attend).
Let’s wrap this up because I want to save some of this info for our live event.
ANDY: Here’s the bottom line.
Poor Man’s Covered Calls let you sell calls without locking up huge amounts of capital. This options trade gives you downside protection AND upside protection. Providing you a mechanical, repeatable process to earn regular income.
Sounds like the perfect solution for folks who want to earn more income – every single month.
This exclusive and LIVE training event is NOW OPEN.
Secure your spot ASAP – we will be 100% FULL.