A Poor Man’s Covered Call is an options strategy that simulates the risk-reward profile of a traditional covered call, but with significantly less capital outlay. Instead of owning the underlying asset, the strategy involves buying a deep in-the-money (ITM) long-term call option (often called a LEAPS call) and simultaneously selling a shorter-term, out-of-the-money (OTM) call option against it. This approach aims to generate income from the sold call premium while maintaining synthetic exposure to the underlying asset.
Mechanism
Operationally, the long LEAPS call acts as a capital-efficient substitute for holding the underlying crypto asset, as its delta approaches 1.0, mimicking the price movement. The short OTM call is then sold against this long-term option, similar to how one would sell a call against owned shares. The premium received from selling the short call contributes to income and helps offset the cost of the long LEAPS call. If the underlying crypto asset’s price rises above the short call’s strike, the strategy’s profit is capped at the difference between the strike prices plus premiums received, minus the cost of the LEAPS.
Methodology
The strategic methodology of a Poor Man’s Covered Call is centered on leveraging options to achieve a similar outcome to a traditional covered call with reduced capital commitment. It appeals to traders seeking to generate consistent income from premium collection while limiting capital at risk, especially in crypto markets where direct ownership of large asset quantities can be capital intensive. This method aims to benefit from time decay on the short call and potential appreciation of the underlying synthetic position, making it a nuanced strategy for yield enhancement and defined risk management.
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