Never Do Poor Mans Covered Call In Indian Stock Market

Video transcript

In today's article, let us see what is poor man's covered call(PMCC) and why we should never do poor man's covered call in indian markets.

In a normal covered call, we need to buy 1 lot of stocks. If we take reliance stock, it's LTP is 2600 and lot size is 250. So one lot of reliance stocks cost around 6.5 lakhs. To do a normal covered call you need a capital of 6.5 lakhs and an additional capital of 1.5 lakh to sell the call option. You need around 8 lakhs capital in total.

For people who doesn't have that much capital, they can go for poor man's covered call.

In poor man's covered call instead of buying one lot of stocks, we can buy next month deep in the money call option.

If we look at next month reliance option chain, 2500 call option premium is around 150 rupees. So that costs around 37,000. So instead of buying one lot of stocks we can buy one in the money call option for next month and we can sell OTM call option in the current month. For this we need a capital of only two lakhs.

Here the capital is reduced almost by 75%. This strategy is also called as diagonal calendar spread.

This strategy is originally started in U.S markets and a lot of people have been making good profits in U.S markets.

A lot of people in india they just see those videos and they are just making same videos again for indian market. But most of them don't know the disadvantages of implementing poor man's covered call in indian stock markets.

Here are some disadvantages of PMCC in Indian markets.

In U.S. markets, stocks have weekly expiries and LEAPS as well which are not available in indian market.

Apple is one of the most actively traded stocks in the U.S. markets and if we look at apple option chain, they have options till Janurary 2024 that has almost three years time. Even in that series, there is still good liquidity, volume and spread(bid and ask price difference is very low).

When you buy LEAPS, there won't be much time decay and you can profit from PMCC.

In indian markets stocks have monthly expiries and it is available for only 3 months.

Reliance is once of most actively traded stocks in India. To implement PMCC we either have to buy next month or the upcoming month options. If we look at the next month options, there is no much liquidity or open interest and spread is huge.

Since there is no much time value left in these options, premium erodes much faster. Unless the stock makes a huge move you can't really benefit from PMCC. In the long run, it is quite hard to make profit from PMCC in Indian markets. there is no liquidity also so even

Another disadvantage with poor man's covered call is you have to book losses every month.

In a normal covered call, when the stock falls your loss will be unrealized and can keep on selling next month call options.

So, what are the other alternatives for people who doesn't have much capital?

One option is to go for fractional covered calls. In the upcoming article, lets look at fractional covered calls in detail.