Arjun Trader

Options trading provides traders with numerous ways to generate income and hedge their portfolios. Among the most popular strategies are the Big Boys Covered Call and the Poor Man’s Covered Call (PMCC). Both strategies help generate returns, but they require different levels of capital and risk exposure. In this article, we’ll explore these strategies in detail and provide a real example from the Indian stock market.

What is a Covered Call?

A covered call is an options strategy where a trader holds a stock and sells a call option against it to generate income from the option premium. This strategy is commonly used by long-term investors looking to generate extra returns from their holdings.

Big Boys Covered Call

A Big Boys Covered Call is the traditional form of the strategy, where a trader buys 1 lot of a stock and sells a call option on that stock. This requires significant capital but provides a lower-risk income stream.

How It Works:

1. Buy at least one lot of a stock.
2. Sell an out-of-the-money (OTM) or at-the-money (ATM) call option.
3. Collect the option premium, which lowers the overall cost of holding the stock.
4. If the stock remains below the strike price, the call option expires worthless, and the trader keeps the premium.
5. If the stock rises above the strike price, the trader may be required to sell the shares at the strike price, potentially limiting gains.

Pros & Cons

✅ Steady income from option premiums.

✅ Works well for long-term investors who don’t mind selling their shares.

❌ Requires a large capital investment to buy shares.

❌ Limited upside if the stock price rallies significantly.

Poor Man’s Covered Call (PMCC)

The Poor Man’s Covered Call is a variation of the covered call but requires less capital. Instead of buying the stock, the trader buys a deep-in-the-money (ITM) long-term call option (LEAP) and then sells a short-term call option against it. This reduces the capital requirement while mimicking the covered call strategy.

How It Works:

1. Buy a long-term ITM call option (typically 3+ months to expiry).
2. Sell a short-term OTM call option.
3. Collect the option premium from the short-term call.
4. Adjust the trade as required based on price movement.

Pros & Cons

✅ Lower capital requirement compared to a traditional covered call.

✅ Can be used for stocks with high prices where buying shares is expensive.

❌ More complex to manage as the ITM call will have time decay (theta decay).

❌ Higher risks if the stock moves against the trader significantly.

Real Example from the Indian Stock Market

Let’s take Reliance Industries (RIL) as an example to understand both strategies.

Big Boys Covered Call Example

• Suppose Reliance is trading at ₹1,400 per share.
• Lot size: 500 shares (as per NSE options contracts).
• Total investment: ₹7,00,000 (₹1,400 × 500).
• Sell a ₹1,500 Call Option for ₹20 premium.
• Premium earned: ₹20 × 500 = ₹10,000.
• If Reliance stays below ₹1,500, you keep ₹10,000 premium.
• If Reliance moves above ₹1,500, shares may be assigned, but you still make a profit up to ₹3,000.

Poor Man’s Covered Call Example

• Instead of buying shares, buy a 3-month ITM call at ₹1,250 strike for ₹200 premium.
• Total investment: ₹1,00,000 (₹200 × 500).
• Sell a ₹1,500 short-term call for ₹20 premium (same as above).
• Premium collected: ₹10,000.
• If Reliance remains below ₹1,500, you keep the premium and repeat.
• If Reliance moves above ₹1,500, adjustments may be needed.

Which One Should You Choose?

• If you have significant capital and prefer stability, go with the Big Boys Covered Call.
• If you want a lower capital requirement and can actively manage the position, try the Poor Man’s Covered Call.

Both strategies can generate consistent returns, but each has its own risks and rewards. Understanding these nuances can help traders in India maximize their returns in the stock market.

Final Thoughts

Covered calls, whether in the Big Boys or Poor Man’s style, can be a great way to generate passive income. However, proper risk management is key. Always consider market conditions, implied volatility, and stock fundamentals before entering these trades.

Happy Trading! 🚀