A ‘Poor Man’s’ Covered Call option play is a way for an option trader to structure a very similar type of risk/reward ratio as an ordinary covered call but with much less capital required.

A ‘Poor Man’s’ Covered Call is another name for a Long Call Diagonal Debit Spread that is used to create a something similar to a Covered Call position. It’s nickname comes from the need to use this option structure as an play by an option trader with less capital but can also be used for higher returns on the percent of capital in the option play. 

A long diagonal debit spread is created with calls by buying one longer term call option with a lower strike price and selling one shorter term call with a higher strike price. This option strategy is opened for a net debit and the profit potential for the short call option and risk on the long call option are both limited. This is not like a standard covered call that has unlimited risk on the stock position that the covered call is written on during the duration of the option play.

It is a bullish play betting on higher prices in the stock before both options expire. The most profit a ‘Poor Man’s’ Covered Call can make is if the stock price at expiration is the same as the strike price of the short call on expiration of the play. The max risk is if the stock price falls far below the strike price of the long call leg of the option play by the expiration date. The total risk is the difference of the long option subtracted from the short option. 

In a long diagonal debit spread option play your longer term option that has less theta decay and less delta capture acts as your long stock in a standard covered call. Your near term short call option plays the same role as it does in a standard covered call as you try to profit from selling the premium if it expires worthless and you profit from the theta decay. 

This ‘Poor Man’s’ Covered Call play is different from a standard covered call as your long call will decline in theta value as it gets closer to expiration but it does act as a hedge for the short leg of this option play so less margin is required than in naked short calls that are cash secured. The profit on this play is the difference in speed of theta decay between your long and short options. 

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Poor mans covered call

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.