Background

I was checking my positions in Marathon, where I bought Leaps and created a synthetic Spread or Poor Mans covered call.

I own some Leaps in Marathon, long expiration calls expiring in 2023. These are calls, as such they are ownership positions, but they give me control over stock for specified portions of time. Thus in the options market they can be used as a substitute for real stock in several options strategies like covered calls or Calender spread. Today I would like to talk about its use in a covered call.

Set-up

To profit from a covered call you need 100 shares of an underlying stock, to sell call options for, agreeing to provide those stock should certain conditions be met. The money you receive is called a premium. The general idea is to pick a strike price far enough away from the currency price as to be unlikely the stock will rise to that price, so the conditions for selling your stock are not met, and you keep the stock and the premium.
You can do this every week or every month, making a small income.

Example:

You bought 100 shares of Marsthon for 40$.
You sell someone the right to buy your Marathon for 48$ in one month. They pay you 1$ per share of 100$, that’s the premium.
They get the right to buy your Marathon at 48$, and they are gambling Marathon will rise above 48$ and they will buy yours for 48$ and sell it at a higher price and profit. They save money buy only investing 100$ instead of 100 times 40$ or 4000$. You make money also.

But if you don’t have 4000$ usd you can also buy call options on Marathon for 40$ with an expiration date 6 months out, and then sell call options on those call options. Thus you could pay 3$ per share or 300$ and make 100$ per month until your call options expire in 6 months. You make about 600$ on your 300$ investment. This is called a Poor Mans Covered Call because you require less money to set up this strategy.

Current Events

Because Marsthon Patent Technologies has bought hundreds of Bitcoin Miners and is adding Bitcoin to its balance sheet, its stock has rise from 4$ to 40$ in less then a year, a 10x increase. But it’s in the traditional stock market and it has stock options. When Bitcoin price fell, an opportunity rose to buy Call Options on Marathon at a discount. Thus You lower your cost basis significantly and can buy many more with your money. Once Bitcoin rebounds and Marathons price recovers you will be able to sell options in a synthetic covered call position much more profitably because of your increased number of Marathon shares controlled.

Example
If I bought contracts with 1 year expiration for 20 dollars. So one contract was 2000 dollars and 6000 dollars controlled 300 shares of Marathon. Now at 15$ Per contract share 6000$ dollars can control 400 shares and your profit potential increases by 100 shares or 100/300 or 33% increase on potential profit.

It’s exciting if you are into Options Trading.
Comments or Questions?

These are not buying recommendations, just education. Do your own research and never invest more then you can afford to lose..