theta decay

 

The idea behind this strategy is that you benefit from the time decay (theta decay) of the short-term call options you've sold, which helps offset the cost of the long-term LEAP call option. Additionally, if the stock's price goes up, the value of your LEAP call option should increase, allowing you to profit.

Key points to consider:

• The risk in a poor man's covered call is limited to the cost of the LEAP call option, which is significantly lower than the cost of buying the underlying stock.

• The potential profit is limited because you have sold short-term call options that cap your upside if the stock's price rises significantly. Your profit potential is limited to the difference between the strike prices of the LEAP and the short-term calls, minus the net cost of the trade.

• Time decay of the short-term call options works in your favor as long as the stock price remains relatively stable or rises moderately.

• If the stock price declines significantly, you could face losses, but they are limited to the cost of the LEAP call option.

The poor man's covered call is a versatile strategy that allows traders to leverage the benefits of options while requiring less capital compared to a traditional covered call. However, it's essential to understand the risks and manage the position carefully, especially when dealing with options contracts that have different expiration dates.