We believe in a strategy of lowering one’s cost basis by selling OTM calls against a long stock position thus creating a Covered Call, but the problem is it can require a lot of margin and reduce buying power significantly so we ran a study on the bullish Diagonal Spread, aka the poor man’s Covered Call, to determine the optimum time frame for this strategy.
An example comparing the margin required for a covered call in the SPY (S&P 500 ETF) versus a Bullish Diagonal was displayed. The Diagonal was about 6 times less than the conventional Covered Call on a delta equivalent basis. That adds up.
A study was conducted using the SPY from 2005 to present. We compared long at-the-money (ATM) 50 Delta Calls with a 60, 90, 120, 150, 180, 210, 240, 270 and 300 days to expiration (DTE). We then sold 30 delta calls closest to 30 DTE and held until the short call expired. Some traders will buy the deep in-the-money (ITM) LEAP calls to minimize paying for extrinsic value but there are trade-offs to that strategy and we bought the at-the money (ATM) options.
Three graphs were displayed. The first was of the win ratio versus DTE for the long call. The second was of the P/L after the short call expires versus days to expiration of the long call. The third was Return on Capital (ROC) versus the days to expiration of the long call.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways, a better understanding of Bullish Diagonals (Poor Man’s Covered Call) and the results of our study on the optimal time frame for this strategy.
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