Poor Boy’s Covered Calls can be a legitimate alternative to the traditional covered call. Today’s video explains how the strategy works and reviews some of the best practices. It ends with a comparison of the poor boy vs. naked puts and explains why I prefer selling puts if seeking cash flow.

Enjoy!

Notes

Poor Boy’s Covered Call

1. Basic definition/structure of the strategy
2. Do’s and Don’ts
3. PBCC vs. CC vs. NP

Covered Call:

Buy 100 shares of stock (delta 100)

Sell 1 30-day OTM call option (delta -30)

Net Delta +70

CON: Expense of buying 100 shares of stock

Poor Boy’s Covered Call:

Buy 4- to 6-month ITM call option as a substitute for buying stock (Delta 60+), The higher the delta, the more like stock this behaves.

Sell 1 30-day OTM call option (delta -30)

Trade Management for PBCC should mirror what you do with a traditional covered call with one exception. Don’t allow assignment.

1. Ride to expiration and let the short call expire worthless
2. Buy back the short call when you capture 80% to 90% of profit.
3. Roll down the short call if stock drops too much
4. Exit if stock breaks support
5. If stock drops too far, consider resetting the strikes for the poor to better replicate a cov call risk graph.

Common mistakes

1. Not buying a high enough delta on the long call.
2. Not selling far enough OTM on the short call.
3. Not realizing that the long call may turn into a bad long stock substitute if the stock drops too far and the call delta declines too much.
   1. Started with an ITM 70 delta call
   1. Stock drops and now you have an ATM 50 delta call.

Good structure: Buy 70 delta call, sell 30 delta call

Bad structure: Buy 60 delta call, sell 45 delta call

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