Good morning – I’m here with Andy Crowder again to discuss a relatively new and little-known options trade: the Poor Man’s Covered Call.
This Wednesday Ian Wyatt will co-host an event dedicated to this options strategy along with Andy. You can click here to attend for free.
So 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.
KEVIN: Andy, thanks for agreeing to answer my questions 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 does the Poor Man’s Covered Call differ?
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 $66/share. Multiply that by 100, and you need at least $6,600 locked up in Microsoft in order to sell covered calls.
That lets you sell just one covered call. If you wanted to sell two, you’d need $13,200 worth of shares.
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.
KEVIN: Yeah, I guess I’ve rarely ever used a buy-write 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), in-the-money call that gives us the SAME EXACT exposure to 100-blocks of shares, for a substantial discount.
KEVIN: I know the first time I heard this explanation of Poor Man’s Covered Calls, I was confused. So let’s just go through this very simply. I buy a call that’s in the money (below the current price) 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 – usually for a 60%-85% discount. So, to control 100 shares of Microsoft, it wouldn’t cost you $6,600 – it would cost you between $2,000 and $3,300. And the premium you bring selling the short=duration calls is the same. So you can earn much more cash-secured income than you would if you bought the shares outright.
I should emphasize, it’s not “artificial” – it’s synthetic. It’s the same – except we don’t get paid dividends while we own the call, and we don’t get any other benefits of actual ownership like voting rights or shareholder announcements – only price movement benefits.
KEVIN: So then, I have this long-dated call, 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 long-dated call 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.
KEVIN: OK I think we’re getting a little too “down the rabbit hole” . . . so just give me some numbers. 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, we’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 66%. That includes a mix of income and unrealized capital gains.
Here’s how it’s working for Wal-Mart:
We bought the January 2018 $45 call for $1,510. That $1,510 gives us synthetic control of 100 shares of Wal-Mart. If we had simply bought 100 shares, it would have cost us $5,885. So we’re basically getting the upside of WMT for a74% discount.
And we’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 long-dated call has almost doubled in price.
KEVIN: Let me wrap this up because I want to save some of this info for our live event on Wednesday, but the basics are: Poor Man’s Covered Calls let you sell calls:
- Without locking up huge amounts of capital.
- Giving you downside protection AND upside protection.
- Giving you a mechanical, repeatable process to earn regular income.
Am I missing anything?
ANDY: Well there’s a little more to it, which is why we’re hosting a live training event this week on this income strategy.
KEVIN: Thanks Andy. This was very helpful… I’ll tune in and check out your event this week. Thanks for your time!
There’s uncertainty in the market right now, but we’re excited about this Poor Man’s Covered Calls event.
Andy’s presentation this week will reveal all the details – including his exclusive trading strategy. Plus, I know Andy is preparing to share three Poor Man’s Covered Calls trades that could add $812 in income to your account.
Registration is now open for Andy’s webinar.