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June 30th, 2022
The continued sell-off this year has hit some big names of the SP500 particularly hard. Stocks like Amazon (AMZN), Adobe (ADBE), and Boeing (BA), to name a few, are all down more than 30% in the first half of the year. Volatility remains high, so now may be the right time to implement an options strategy that allows you to collect a premium on the shares you own.
Selling covered calls for income is a fairly known strategy in which case you sell the right to purchase your shares of an underlying stock at a certain price and date in exchange for cash upfront. If the stock is at or under the strike price you sold at the date of expiration, you as the options seller will keep the premium you collected as well as the shares.
What if you have a smaller account and don’t own 100 shares of Adobe (ADBE), which is currently trading at $368.50 a share? To sell a covered call of Adobe, you’d need $36,850.
There’s still a way you can sell covered calls without owning the shares! That’s right, for a fraction of the cost of owning the shares, you can still collect the same premium each week or each month with this covered call trading strategy.
It’s called the poor man’s covered call. Keep reading to find out more about this strategy.
While a traditional covered call uses long shares for bullish exposure, a poor man’s covered call uses a long call.
A standard covered call works by purchasing 100 shares and then selling an out-of-the-money (OTM) front-month call against it, typically at a higher price.
The poor man’s covered call (PMCC) works by purchasing a deep-in-the-money (ITM) back-month call and then selling an OTM front-month call.
Going back to my Adobe (ADBE) which dropped from $699.54 to a current price of $368.50 in six months.
Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society
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