Stop Selling Covered Calls — Do This Instead

Why It Matters

It reveals how traders can free capital and dramatically increase yield on expensive stocks, reshaping income‑generation strategies while highlighting the trade‑off between leverage and risk.

Key Takeaways

• Covered calls lock up huge capital for modest monthly returns.
• Poor man's covered call uses deep‑in‑the‑money LEAPs, reducing risk.
• Leverage yields ~10% monthly return on capital at risk.
• Dividend‑paying stocks may still favor traditional covered calls.
• Managing two expirations adds complexity to the diagonal spread.

Summary

The video critiques traditional covered calls as capital‑intensive, using Nvidia as a case study, and introduces the "poor man's covered call" – a long‑dated deep‑in‑the‑money LEAP paired with a short‑dated call – as a more efficient alternative.

A standard covered call on Nvidia requires roughly $20,000 for 100 shares and yields about $400 premium, a 2.2% monthly return, while exposing the trader to full downside risk. By contrast, buying a deep‑ITM LEAP for around $4,750 and selling the same short‑dated call caps risk at roughly $4,300 and boosts the return on capital at risk to about 10%.

The presenter highlights concrete numbers: the LEAP’s delta of 70 and theta of 12 versus the stock’s delta of 100, and shows how adjusting the short‑call strike to 230 can smooth upside while still delivering roughly 5% monthly on the reduced capital base. He notes the trade‑off of missing dividends and handling two expirations.

For investors, the approach offers significantly higher income efficiency for high‑priced, low‑dividend tech stocks, but it introduces leverage and operational complexity. Choosing between the two strategies depends on capital constraints, dividend considerations, and tolerance for managing multi‑leg options spreads.

Original Description

If you're selling covered calls on stocks like Nvidia, you're tying up $20,000 in capital to earn a 2% monthly return — while carrying the full downside of 100 shares in a highly volatile stock.

Most traders don't realise there's a way to run the exact same strategy with the same income potential using a fraction of the capital.

In this video, you'll learn why the standard covered call has a structural weakness nobody talks about, and the strategy you should be using instead.

📈 What You Will Learn:

The Hidden Problem With Covered Calls:

✅ Why buying 100 shares of Nvidia costs $20,000 per contract

✅ Selling one monthly call generates ~$400 — a 2.2% return on $20K

✅ A 15% drop in Nvidia = $3,000 unrealized loss vs $400 in premium collected

✅ Capped upside, nearly unlimited downside, massive capital requirement

✅ Why covered calls are capital inefficient — and what to do instead

The Poor Man's Covered Call — How It Works:

✅ Replace 100 shares with one deep in-the-money LEAPS call option

✅ The long call acts as a stock substitute at a fraction of the price

✅ Still sell the shorter-dated call exactly as you would in a covered call

✅ Why you want a delta of 70 or higher on the long call

✅ The deeper in the money, the more it behaves like stock ownership

Real Nvidia Example — The Numbers Side by Side:

✅ Standard covered call: $20,880 capital required, unlimited downside

✅ Poor man's covered call: $4,747 capital required, max loss ~$4,300

✅ Same $430 monthly income from the short call — same income leg

✅ Income as a percentage of capital: 2% vs 10% — same trade, very different efficiency

✅ How to adjust the short strike for more upside potential

When to Use Each Strategy:

✅ Poor man's covered call: expensive stocks where buying 100 shares isn't practical

✅ Standard covered call: when you already own the shares long-term

✅ Why the poor man's covered call doesn't work as well on high-dividend stocks

✅ The leverage consideration — why you don't want too many of these on at once

✅ Coca-Cola vs Nvidia — which strategy fits which stock

🔗 Helpful Resources:

Option Wheel Tracker Spreadsheet - https://optionstradingiq.com/wheel-tracker

Wheel eBook - https://optionstradingiq.com/wheel

10-Part Iron Condor Course - https://optionstradingiq.com/10-part-iron-condor-course

Options Trading 101 - https://optionstradingiq.com/101-book

OTIQ Best Articles - https://optionstradingiq.com/best-articles

Master Credit Spreads - https://optionstradingiq.com/mastering-credit-spreads

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This video is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Options Trading IQ Pty Ltd (ACN 658 941 612) is a Corporate Authorised Representative (CAR No. 001312737) of Point Capital Group Pty Ltd (ACN 625 931 900), holder of Australian Financial Services Licence (AFSL No. 518031).

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