Covered calls
While holding on to an asset that you believe has long-term growth potential, you can generate income from holding those shares while waiting for the next bull cycle. Let's take Apple ($AAPL) for example. If I bought 100 shares of apple for $160 a share and wanted to hold on to these for long-term growth I can create income by selling call options against my stock. You choose an option strike price that is higher than the price of the stock and sell the call. This grants permission to the person who bought the call to buy your shares from you at the strike you choose, if they run in the money. The risk is, that if the call option runs in the money by the expiration date then the option may be exercised. You get to keep the premium and sell your shares at the strike price. It would look something like this
100 shares of AAPL at $160 = $16,000
Selling a call against your shares at the strike of $165 for a premium of $120
If Apple reaches the price of $165 and you are exercised you will receive $16,500 for the stock you owned and $120 from the call option sold to make a profit of $620.
If the call option you sold does not run in the money, you get to keep your shares and the $120 in the premium you collected.
Poor Mans Covered Call (PMCC)
Now let's say you can't afford 100 shares of Apple, but you would still like to generate income from the asset while remaining long-term bullish you could do what is called a Poor Mans Covered Call or PMCC
The poor man's covered call is a great options strategy to generate income without having to hold the underlying asset. You're able to generate income from sideways movement in an asset while also remaining bullish in the long term. Stocks go through cycles, of bullish and bearish momentum and periods of consolidation. If you want exposure to an asset because you speculate it will grow you would buy a call option with a far-out expiration date known as a Leap. While holding onto this far-dated call option you can sell weekly calls against it to generate weekly income. There are rules to keep in mind when doing so, and this can come with more risk than owning the underlying shares.
If you already trade options then I hope you already know the greeks. and the safest way to do a PMCC is to make sure your long-dated call has at least a 0.80 Delta and the calls you sell against it have a Delta under 0.30. while still using Apple as my example it would look something like this.
If I had bought an Apple leap in June at the market low it would look something like this
$135 strike with an expiry of Jan 2023 would cost me $1240 and that has a Delta of 0.81
This grants me the right to purchase Apple shares for $135 a share at the expiration date.
So now I have exposure to Apple without having to own 100 shares and it only cost me $1240 instead of $16,000
While holding this Leap, I can sell short-dated calls against it and I want to make sure that the delta is under 0.30 and that the strike is more than my break even. The break-even for this leap would be the strike amount plus the premium paid, $13,500 + $1240 = $14,740 so my break-even would be $147.40 a share. I would want to sell weekly calls with a strike price that is higher than that.
You would make roughly $20-$50 a week while your long call also gains value. It's been about 5 weeks since Apple's most recent low and that same long-dated option is now worth $3370 and I would have made at the lowest $20 a week. That would come out to a profit of $2,250 If I sold the long-dated call at the time this post was made.
Now the market did get a nice rally this week due to all the fed talks which is why this profit would have been so much, but realistically when doing PMCC you would expect to make about 2% of the capital you put in weekly. Leaps are best bought after a big sell-off from the whole market, very rarely will you ever catch the exact bottom so please keep that in mind.
If you would like to learn more about Covered calls and Poor man's covered calls I highly suggest checking out Brad Finn on youtube.
I hope you were able to learn something from me today, and thank you for taking the time to read. Please note that I am not a financial advisor, this is not financial advice it is purely for educational and entertainment purposes. If you're looking for a stock brokerage you can get free stock from my referral links below.
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