Is This Potentially the Best Strategy For Small Accounts?

Summary

In this video, the speakers discuss the Poor Man's Covered Call (PMCC) strategy, a capital-efficient alternative to traditional covered calls. They explain how using an in-the-money long call option instead of 100 shares of stock can replicate the risk/reward of a covered call, with much lower capital requirements. Key insights include selecting a 30 Delta for the short call and a 70 Delta for the long call, with an optimal expiration of 60 days. The study shows that PMCC offers similar returns to the rich man’s covered call while minimizing capital exposure, making it an attractive option for income generation in options trading.

Takeaways

• 😀 Covered calls are a strategy involving selling out-of-the-money calls while holding 100 shares of stock or an underlying asset.
• 😀 A Poor Man's Covered Call (PMCC) recreates a similar profit and loss dynamic using an in-the-money long call instead of stock, reducing capital requirements.
• 😀 The 30 Delta short call is generally considered a good strike for a covered call, balancing risk and reward.
• 😀 The long call strike is typically chosen between 60 and 90 Delta, with 70 Delta being a common recommendation for a good balance between capital efficiency and profit potential.
• 😀 Using a Poor Man’s Covered Call strategy reduces capital intensity compared to buying stock outright, making it a more capital-efficient approach.
• 😀 Research shows that the win percentage, average P&L, and reliability are nearly the same across different strikes and expirations when using PMCC, but the capital required increases with longer expiration dates.
• 😀 Longer expiration dates, such as 6 months to 1 year, increase the capital requirement significantly but do not notably improve win percentages or P&L.
• 😀 For the most capital-efficient PMCC setup, the ideal duration is around 60 days, balancing credit received and capital usage without giving up too much profit potential.
• 😀 A 70 Delta long call is often the optimal choice for the long position in PMCC, providing a good mix of profitability and cost-efficiency compared to other delta options.
• 😀 In the long run, the Poor Man’s Covered Call strategy can replicate the success of a traditional covered call but with vastly reduced capital outlay, making it appealing for smaller traders or those with less capital to deploy.
• 😀 The strategy has shown consistent success in backtesting, leveraging decades of data, and tends to perform well in the context of positive market drift.

Q & A

What is a Poor Man's Covered Call (PMCC)?

A Poor Man's Covered Call (PMCC) is a strategy that replicates the profit and loss dynamics of a covered call but with significantly less capital required. Instead of owning 100 shares of a stock, you use an in-the-money long call option to represent the shares, and sell a short out-of-the-money call option.

How does the PMCC strategy compare to a traditional covered call?

The primary difference is that the PMCC requires much less capital than a traditional covered call. A traditional covered call requires buying 100 shares of stock, while the PMCC uses a long in-the-money call to simulate ownership of the shares.

What was the focus of the 15-year study conducted in the transcript?

The study focused on comparing various setups of Poor Man's Covered Calls using different Delta values (60, 70, 80, 90) for the long call, with the short call always set at 30 Delta. The study also compared different expiration periods (45 days, 60 days, 6 months, and 1 year) to evaluate the capital efficiency and profitability of each setup.

What was the optimal Delta for the long call based on the study?

The 70 Delta long call was considered the most optimal choice. It balanced capital efficiency and profitability well, providing a solid return without requiring excessive capital.

What effect does the expiration period have on the PMCC strategy?

Longer expiration periods, such as 6 months or 1 year, require significantly more capital because the long call becomes more expensive. However, the profit potential and win percentage remained largely unchanged across different expiration periods.

What is the significance of the 30 Delta short call in the PMCC strategy?

The 30 Delta short call is typically chosen because it strikes a good balance between risk and reward. It is out-of-the-money, meaning it has a lower probability of being exercised, which provides the trader with the opportunity to collect premium while limiting potential losses.

How does the capital required for a PMCC change with different expiration dates?

The capital required for the PMCC strategy increases as the expiration period lengthens. For example, a 45-day expiration requires around $800, while a 1-year expiration requires around $2,500. This is due to the increasing cost of the long call option as expiration dates extend.

What was the conclusion about using a rich man's covered call compared to PMCC?

The study showed that the rich man's covered call (which uses 100 shares of stock instead of a long call option) was not significantly more profitable than the PMCC. However, the rich man's strategy required much more capital, making the PMCC more attractive for capital efficiency.

What are the primary takeaways from the study regarding the PMCC strategy?

The key takeaways are that the PMCC strategy is an efficient way to replicate the benefits of holding stock while requiring less capital. The optimal strategy involved using a 70 Delta long call, a 30 Delta short call, and a 60-day expiration for the best combination of capital efficiency and profit potential.

Why did the study emphasize the use of 70 Delta and 30 Delta for the long and short calls, respectively?

The 70 Delta long call was considered optimal because it provided a balance of profit and risk, while the 30 Delta short call was chosen because it represents a reasonable strike price that generates premium without being overly risky. This combination was found to be the most effective for the PMCC strategy.