Alternative Covered Call

I would like to review 3 types of positions to help understand a strategy I call Stock Alternative Covered Call, or Alternative Covered Call. You must completely understand the 3 positions before getting into an Alternative Covered Call. One is the basic Covered Call, one is LEAPS options, and the last is a Diagonal Bull Call Spread.

Covered Calls

As I Mentioned in the previous page titled Covered Call, Covered Calls are in the first chapter of every book on options as an important tool in trading, and it’s known as the strategy with the lowest risk. Every options trader, from beginners to professionals, must know and understand what a Covered call is and will use it as a strategy many times in their trading career.

Definition: A Covered call is an option strategy where the owner of a stock, writes (sells) an option against that stock in an attempt to generate extra income from that stock. The money received is called the Premium. The investor’s long position in the stock is the “cover” because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. If the investor simultaneously buys stock and writes call options against that stock position, it is known as a “buy-write” transaction.

Some investors/traders, maybe most, own stock and like to sell Calls as a way to generate extra income while holding the stock. They will pick a Strike Price and Expiration Date to try to make sure they don’t get assigned. Other investors/traders, like myself, like to get assigned, and will pick a Strike Price closer to At-the-Money for the bigger premium. In most cases, my strategy is to get a larger premium, get assigned, and move on to the next trade. Everyone has a different strategy.

LEAPS

Long-term Equity Anticipation Securities (LEAPS) are no different from short-term options except for the later expiration dates. Lengthier times until maturity allow long-term investors to gain exposure to prolonged price movements.

Please read my page on LEAPS to make sure you completely understand LEAPS and the benefits of using them.

Diagonal Spreads

The Diagonal Bull Call Spread strategy involves buying long term calls and simultaneously writing an equal number of near-month calls of the same underlying stock with a higher strike.

Example: You buy a 10 contract LEAPS option on a $50 stock. The Expiration Date is out 1 year. At the same time you sell a 10 contract $55 Call. This Expiration Date is out 1 week, 1 month, or even a few months. As long as the Long LEAPS option you purchased has a longer contract and a lower Strike Price than the Call you sell.

If you want to read about me getting into a Diagonal Bull Call Spread you can go to Results Week Ending 7/19/19. If you go to this page the Diagonal Bull Call Spread is explained at the bottom, after my weekly report. And you can read about me getting out of that position at Completely Out of My MU Diagonal Bull Call Spread.

Alternative Covered Call

Now, without further adieu, let’s get into the reason for this page.

My Wealth Builder page has many pages. All pages lead up to my Wealth Builder Portfolios page. This page contains my 3 portfolios. They are the 5 Star Trading Portfolio, Pillar of Strength Portfolio and the Stock Alternative Portfolio. From time to time I might sell Covered Calls against stocks in the 5 Star Trading Portfolio and the Pillar of Strength Portfolio. The Stock Alternative Portfolio will hold LEAPS options. From time to time, I will also sell Calls against these LEAPS positions with a strategy I call Stock Alternative Covered Calls, or just Alternative Covered Calls for short.

A Diagonal Bull Call Spread is a position like a Covered Call. Only you don’t buy the stock, you buy a  Long Call Option to cover a Short Call Option you sold. Instead of buying the stock, you buy the “right” to buy the stock. I know it can get confusing but this is just one of the many moves you can do with options, and what makes this game so interesting.

With a Buy-Write Covered Call you simultaneously buy the stock and sell the Call.  And with a Diagonal Bull Call Spread you simultaneously buy a Long Call option and sell a Short Call with a closer Expiration Date and higher Strike.

An Alternative Covered Call is very similar to both a Diagonal Bull Call Spread and a Covered Call. Let’s take a look at some of the differences.

A Covered Call is selling a Call option against stock you own. What makes this “Covered” is owning the stock.

A Diagonal Bull Call Spread is the same as my Alternative Covered Call except with the Alternative Covered Call the buying of the Long option and the selling of the Short option are not done simultaneously.

With the Alternative Covered Call I buy the LEAPS option because I like the stock and I feel it will move up for the life of the LEAPS contract. While I’m holding the Long position I sell 1 week, or a little longer, Calls against it many times. Since I’m not buying and selling positions simultaneously it is technically not a Diagonal Bull Call Spread. When I sell Calls against the LEAPS I pick Strike Prices to avoid getting assigned. When getting assigned with a Covered Call you deliver the stock you own. With a Diagonal Bull Call Spread and an Alternative Covered Call you do not own the stock. You own the “right” to buy the stock. If you get assigned with one of these positions it can present a problem.

Most readers know I’m in this game to sell Call and collect premiums. When doing a Covered Call you buy the stock which is a large lay-out of money. When selling Alternative Covered Calls the money you buy the LEAPS with is much less than when buying stock.

I work on margin. When I sell a Naked Call of a Covered Call the money in my account or my margin account is reduced by the amount of the underlying stock. When selling Calls against LEAPS it affects a margin account much less than when buying a stock or selling a Naked Call. If I have more money in my margin account I can make more trades, for more income.

This strategy I call Alternative Covered Call will be a major strategy of mine and it will be used in my Wealth Builder section with the holdings in my Stock Alternative Portfolio. When I use this strategy I will be very careful not to get assigned. I will stay close with the Expiration Date and out a few dollars with my Strike Price. The result will be a much less premium. I will not have my “1 Week/1%” strategy in mind. I’ll be looking at these premiums as a smaller, extra income. Primarily I’ll be in Alternative Covered Calls for the gain on the LEAPS options as the stock moves up;  selling the Calls for smaller premiums as a dividend on a stock. Only I won’t own the stock, I’ll own the LEAPS.