After discovering the supercharged returns of the Poor Boy’s Covered Call (PBCC), many traders ask why you would even bother with a traditional covered call. If I can create a 10% to 15% return with a PBCC, then why settle for a 3% to 4% return on a covered call? It’s a smart question and is one that I’ve had to address countless times.

Below I’ll share my threefold answer, but first, a brief review is in order. I want to make sure we all understand the structural differences between both strategies. We’ll use MSFT, which has been a great profit generator for covered calls this year.

The Covered Call

Step One: Buy 100 shares of stock (MSFT @ $149.50)

Step Two: Sell a one-month 30-delta call (MSFT Dec $152.50 call for $1.55)

Trade Metrics

Cost Basis/Max Risk: $147.95 per share or $14,795 total.

Max Reward: $4.55 per share or $455 total. A 3% ROI.

The Poor Boy’s Covered Call

Step One: Buy 4-month 70+ delta call (MSFT Mar $140 call for $13.55)

Step Two: Sell a one-month 30-delta call (MSFT Dec $152.50 call for $1.55)

Trade Metrics

Cost Basis/Max Risk: $12 per share or $1,200 total.

Max Reward: $2.50 per share or $250 total. A 21% ROI.

Now that we’ve refreshed our memory on the difference between the two, let’s dive into why still using covered calls might make sense.

ROI vs. Dollar Gain

Even if the return on investment is lower for the covered call (3% versus 21% in the MSFT example), the dollar gain is still higher. The PBCC above delivered $250, but the covered call’s max reward was $455. So if you don’t mind tying up the additional capital for the covered call (which might be the case for a big account) you will end up with a more substantial dollar gain at the end of the month even if it’s a lower ROI.

But wait! Couldn’t I do multiple PBCC’s for the same cost as a single covered call?

Definitely. For the same $14,795 you paid for the MSFT cov call, you could do up to 12 poor boys. Wouldn’t that then generate a much higher ROI and a higher dollar gain?

Of course. But then you’re leveraged to the hilt. It’s a dangerous gambit that carries way more risk. Doing two poor boys for $500 ($250 x 2), however, might make sense. It would generate a higher ROI and dollar gain. At the end of the day, though, it still involves more leverage than a 100 share covered call position, so you’re not getting a higher reward without more risk.

The Wrinkle

The PBCC relies on the long-term call you purchased mimicking the behavior of stock. And it will as long as the stock treads water or moves higher. But a wrinkle arises if the stock falls too much that requires you to make an adjustment or else risk your PBCC turning into something entirely different.

As the stock falls, the long ITM call will lose deltas as it moves closer to the money. These are deltas, mind you, that it desperately needs if it’s going to continue running like stock. Remember, 100 shares have 100 deltas. The poor boy requires buying a 70 to 80 delta call because it closely mirrors 100. So what happens if the stock drops dramatically and the call delta falls toward 50 as the strike moves to ATM?

Well, you have to get out of that call and buy a deeper ITM one that has a higher delta. This is known as rolling down. Is that a big deal? Not really. But – and this is the critical point – it’s not something you’d ever have to worry about with a traditional covered call. Stocks maintain their deltas no matter what happens to price.

Size Matters

The case for PBCC is compelling in a small account. If I had, say, $20k or less that I was actively trading and I wanted to incorporate trades like covered calls, then I would definitely favor the poor boy. But the case is less clear with larger portfolios. If I have enough cash available to park in stock for covered call selling, then why not take the higher dollar gain?

Am I missing anything? If so, let me know your thoughts.

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