7 Factors affecting Option Prices

What is a Poor Man’s Covered Call?

The Poor Man’s Covered Call is a refined and cost-efficient version of the traditional covered call strategy. In a standard covered call, an investor purchases the underlying stock and sells call options on it to generate premium income. The Poor Man’s Covered Call, however, modifies this approach by replacing the stock with a deep-in-the-money (DITM) long-term call option, usually known as a LEAPS (Long-term Equity Anticipation Security).

This long-term call serves as a synthetic replacement for holding the actual stock. The trader then sells a short-term, out-of-the-money call on the same stock to earn premium income.

Within India, this structure aligns with the Securities and Exchange Board of India (SEBI) regulations for options trading under recognised exchanges such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), provided that proper margin and risk management controls are in place.

The structure of a Poor Man’s Covered Call strategy

The Poor Man’s Covered Call typically consists of two coordinated positions:

The long call acts as the foundation of the strategy, closely replicating the behaviour of stock ownership. The short call, in turn, provides regular income through option premiums. The aim is to create a low-cost, income-generating setup that retains much of the appeal of a traditional covered call.

Benefits of a Poor Man’s Covered Call strategy

1. Lower capital requirement
   The foremost advantage, particularly within Indian markets, is the significantly reduced capital outlay compared with purchasing the underlying stock outright.
2. Regular income generation
   The periodic sale of short calls produces consistent premium income that helps recover the cost of the long call while enhancing the overall yield.
3. Defined downside risk
   The maximum loss is restricted to the initial premium paid for the long call, enabling traders to predefine their risk exposure.
4. Improved leverage
   The strategy offers leveraged exposure to the underlying stock’s movement without the financing costs associated with holding shares on margin.

Risks and limitations of a Poor Man’s Covered Call

Although the PMCC offers capital efficiency, it also carries specific risks that must be managed carefully.

1. Theta decay (time decay)
   The long call’s time value diminishes as expiry approaches, making it essential to monitor the option’s duration to preserve its efficiency.
2. Assignment risk
   The short call could be exercised prematurely if the underlying stock experiences a sharp upward move, forcing an early adjustment or closure of the position.
3. Liquidity constraints
   Long-dated options, or LEAPS on Indian equities may exhibit lower liquidity and wider bid-ask spreads, impacting trade execution.
4. Limited upside potential
   The sold call caps profits beyond its strike price. Hence, while the downside is controlled, unlimited upside participation is sacrificed.

Poor Man’s Covered Call vs traditional covered call

Key considerations before implementing

• Understand option Greeks: Market participants often view a long call with a delta around 0.80 to 0.90 as a way to achieve price behaviour that is more aligned with the underlying stock.
• Margin and capital efficiency: Confirm the latest SEBI peak margin requirements and margin offsets provided by brokers for calendar spreads.
• Expiry coordination: Roll short calls systematically to prevent mismatches with the long position’s expiry.
• Stock selection: A commonly observed approach involves looking at stocks that are fundamentally stable and liquid, particularly those with active option chains.

Best practices for executing a Poor Man’s Covered Call

1. Track time decay regularly and roll the short call before expiry to maintain consistent income flow.
2. Monitor implied volatility. Selling options when volatility is elevated yields higher premiums and better returns.
3. Avoid illiquid contracts. Focus on stocks with active near- and far-month contracts to ensure smooth position management.
4. Maintain trade records. Keeping a detailed trading log helps in evaluating cost basis, breakeven levels, and cumulative performance.

When to avoid using the Poor Man’s Covered Call

This strategy is not suitable for every market environment. It is best avoided under the following conditions:

• Highly volatile or unpredictable markets, where sharp price swings may trigger frequent adjustments.
• Event-driven uncertainty, such as major earnings releases, dividend announcements, or regulatory news.
• Poor option liquidity, which can distort implied volatilities and widen spreads.

Traders should always align the strategy with their risk tolerance, market outlook, and compliance requirements.

Advanced considerations for experienced traders

Experienced market participants often refer to several broader practices that may support more structured PMCC analysis:

Delta optimisation:
It is commonly observed that long calls with a delta above 0.85 tend to behave more like the underlying stock.

Systematic rolling:
Many practitioners track short calls with fewer than 20 days to expiry, as this period is often associated with faster time decay.

Sector diversification:
Some traders look at applying the framework across varied industries such as banking, technology, and energy as part of overall portfolio diversification.

Volatility skew utilisation:
Market participants often monitor differences in volatility between shorter- and longer-dated options, as these variations can influence potential income characteristics.

Seven major factors affecting option prices

Every option-based strategy, including the Poor Man’s Covered Call, is shaped by core market dynamics. The following are the seven primary determinants of option price that traders must understand:

Understanding these option price factors allows traders to make data-driven decisions rather than speculative ones. 

Conclusion

The Poor Man’s Covered Call represents a disciplined and efficient approach to options trading, particularly suitable for traders seeking income generation with modest capital deployment. By substituting stock ownership with a deep-in-the-money long call and systematically selling short-term calls, investors can achieve stable returns while maintaining defined risk exposure.

Awareness of the determinants of option price, from volatility to time decay, allows traders to refine their entries, manage risk intelligently, and align their actions with broader market conditions.

When implemented prudently and monitored consistently, the Poor Man’s Covered Call can serve as a powerful component of a balanced derivatives portfolio, offering both flexibility and capital efficiency in India’s evolving options landscape.