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  1. Are Long Call Spreads = Poor Man's Covered Call? Bob Baerker wrote:

If so inclined, you can also write OTM short calls against them, turning your long call LEAPs into diagonal spreads and lowering your cost basis. This is called the "Poor Man's Covered Call" which you can also Google.

Each of the three Reddit comments below predicate that you're buying an ITM call with strike price A, then selling an OTM call at strike price B. $A < B < C$. Each recommends rolling the sold OTM call.

  1. But why do they predicate that you can afford rolling? What if the new third OTM call with strike price C's premium skyrockets? Can't rolling the sold OTM call make you net loss?

doougle commented on Jul 27 2016.

This is the type of trade I do the most.

If you do get assigned, there's always exercising the LEAP you can fall back on, though I consider this approach last.

If your short strike is assigned, you'll receive the money for the shares at the strike price. To furnish the shares, you'll have to buy at market value. You'll only be on the hook for the difference in the strike and market. You might even have the funds to just pay it and move on.

If you can't afford that difference, you can sel the LEAPS to pay the rest. If you exercise the LEAPS, you'll be forfeiting the remaining time premium. If you sell them, you collect it.

What I do if I have some shorts that go in the money is roll them out, bringing in a little more money. If they get too far in the money, the roll value lessens, I might just close the whole position.

kpmooney commented on Jul 27 2016.

I assume you are buying an ITM LEAPS and selling near-month calls against it. You seem to be confused about what it means for the trade to go against you. Assuming your short call paid for the extrinsic value in the short call, you have no risk to the upside and want your short call to be tested. You lose when the stock falls and your LEAP loses value. In that case there's nothing much you can do other than rolling down the short call.

If the stock has a huge rally and blows through your short call, you'd just close the position for a profit. If, by chance, someone exercises the short call, you'd either buy in the short stock and sell out the LEAP, or exercise the LEAP which would close out the short stock position.

Which of those you would choose depends on the liquidity of the LEAP (they are often not very liquid) and the amount of time value left in it.


u/Leviathan97 commented on Apr 5 2018

If you are assigned on the short call, you will be short an equivalent number of shares of stock. That will exactly counterbalance any intrinsic value lost on the LEAP option, should the price of the underlying decline before you unwind the position, either by exercising your LEAP option or by buying back the short stock and selling the LEAP simultaneously. Assuming your LEAP option is properly selected to minimize extrinsic value (deep ITM and far-dated expiration) the risk profile is essentially identical to a traditional covered call, assuming reasonable price movement. (And actually advantageous for large downside moves, because your actual loss will be limited to the cost of the LEAP option less the premium received for the short call, rather than the entire price of the underlying, and because extrinsic premium expansion will somewhat buffer your position if the price declines far enough to approach the strike price of the LEAP.)

One caveat here is that if the early exercise occurs the night before an ex-dividend date, you will be out the cost of the dividend (which you will now be responsible for paying on the resulting short stock position), minus whatever extrinsic was left in your short call (which you will have essentially recaptured for free when you are assigned). So keep an eye on those dividend stocks and roll or close positions where you’re short ITM calls with a near-dated expiration as a dividend approaches that exceeds the extrinsic value left in your short calls.


manojk92 commented on Jan 5 2019

You get assigned on short position, anyway with a magin account you don't exercise your long call to cover your short position (100% loss of any extrinsic value), you will just be short stock. Most of the time you are looking to roll when you are tested and close to expiration.

Anyway, a PMCC is a bullish trade. The deep ITM call has around $80+$ deltas while the short call is about $-30$ deltas. If you let yourself get assigned, you will have a bearish position instead as the stock gives $-100$ deltas.

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No, a Long Call Spreads IS NOT equal to a diagonal spread. Your image depicts a vertical spread.

Your question was TLDNR so thanks for quoting my Answer at the top of your novella :->)

As a general rule for opening diagonals, if the cost of a diagonal spread is less than the difference in strikes then the spread cannot lose if the price of the underlying skyrockets without the opportunity to adjust.

Rolling becomes "too expensive" if the short call of a bullish diagonal gets deep ITM. A better description would be to say that the deeper the short call goes ITM, the lower the amount of time premium that you will get for a horizontal roll. Then, you'll just be treading water. Therefore, assuming no gap, roll in the vicinity of the short strike.

A good rule of thumb is to trade time for intrinsic value. IOW, when the underlying approaches your short call strike and if you are still bullish, roll the short call up a strike or more for close to a breakeven or even a credit and out a week (if it trades weeklies) to a month . That will give you additional upside.

I'd add offer another suggestion that has a lot of 'ifs' to it. If you have a diagonal where the long leg has become very deep ITM, sometimes it's possible to roll it up as well, lowering cost basis. Given that it may cost you some time premium and given the B/A spread tends to be wide on deep ITM options, this isn't a frequent possibility.

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