It has been a while since I first heard about the term Poor Man's covered call. It took me some time to put all dots together to understand how this trading technique actually works.
Now it feels I know how it works (at least I think so). Long story short - we are buying LEAP options with expiry far in the future with delta 0.8 / 0.9 and selling near the money short term calls against it.
Practice make perfect, and instead of paper trading or trading big I decided to search for a really cheap stock I could buy LEAP option with EUR 100 or less it didn't take long and I found one European stock to test with
here is the setup
- BOT 1 AGN DEC 20 '24 2 Call Option 0.95 EUR
- SLD 1 AGN MAY 15 '20 2.6 Call Option 0.04 EUR
I'm buying a long call with expiry far in future in December 2024, paying for that EUR 95 (+0.80 EUR commission)
Simultaneously I'm selling a covered call against it with expiry in 15 days (May 2020), for that I'm receiving a premium of EUR 4 (-0.80 EUR commissions)
Potential return 3.33% in 15 days. Annualized 364.95%
In theory, I could turn a small investment of EUR 95 into EUR 441.70 in just one year. think what could it turn in 4 years? EUR 1,764.
Hold on, no so fast
In practice it might not work as good in theory, the will be adjustments, rolls, and so on.
We could, of course, buy this share instantly at EUR 2.48 and sell a covered call against it, but then our investment would be 2.5X bigger than in the case with LEAP options. Also, the potential return would be 2.5x times smaller
Poor Man's covered call on Aegon stock