Comparing Covered Call Options Strategies

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Tom Sosnoff and Tony Battista compare two different covered call strategies, the poor man’s covered call and a standard covered call. They find out the difference in capital requirements for each strategy and how this affects your return on capital.

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Pradeep Gaikwad says:

Hey am form India , the Strategies suggested by you are really useful .
But do you know whether reducing margin requirements using covered call works in India as well because am facing issue with it.
It would be of great help if you let me know whether any broker offers the same in India .

BeatsPlanetMusic says:

Very well explained guys!

Eric Moles says:

Leggo, jonesr227 is correct.  The didn't look at outright stock ownership.  The covered call limits your upside, and they sold the first strike out of the money.  They were probably called away almost half of the time….i.e. they limited the upside a lot.  The point of the study was to compare a covered call (capital intensive) to a 'poor man's covered call'.

mjs28s….I would phrase it as 'a covered call lowers your cost basis, adding limited downside protection'.  I think you get it, but I didn't want other viewers to think there is no downside risk due to your phrase 'protect your downside'.  A covered call is a long position.  If the stock goes to zero, you lose everything except what you collected for selling the calls.  This could be an added benefit to a poor man's covered call.  

mjs28s says:

With covered calls they had times that they were called out and thus, missed some of the upside during some of the periods.

Covered calls will cap your upside and protect your downside.

jonesr227 says:

Mr Leggo, What exactly do you think is wrong with this study? Tastytrade did not provide a comparison with the P/L of the just the stock. Without looking specifically into the case of WMT stock it may be useful to recall that the covered call is a strategy which limits the upside to stock appreciation. Would this possibly explain the results shown?

Leggo My Ego says:

Is it just me or do the numbers in this study not add up? If the study is over the last 2 years, WMT has appreciated $23 per share. Since we're talking about a 100 share lot, that's $2,300. WMT also has a dividend of 1.88 (yield 2.5%), so that's $2,676 profit over the last two years not even including the call premiums.

Is it just me, or is there something really wrong with the results in this study?

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