Synthetic Covered Calls Strategy

Basic Covered Call Strategy

An option buddy of mine recently provided this strategy for me to do in the long term, for passive income.

All option traders know what is covered calls. You own a particular stock, you then sell calls against this stock that you own, at a strike price that you are happy to sell your stock

For example, Disney stock (DIS)is at $95 right.
so if I have 100 stocks of DIS at $95 now (option traders will always sell puts to get a stock instead of outright purchase)

I will be able to sell covered calls, for example at $105 strike price.

There would be no margin required by my brokers, since I own the stock. If the Call get exercised (meaning DIS price goes above $105), I would be happy that my stocks get sold for $105.
If the call does not get exercised (DIS stays below $105 by expiry date), then I would keep the premium from the sales of the call.

My favourite is to sell options that are 45 days to expiry, and to close them at a profit then when it is around 30 days to expiry. If it touches my strike price, then I leave it to get exercised.

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Synthetic Covered Calls 

Instead of owning DIS at $95 outright and selling covered calls, another more efficient way is to BUY a very long term Call, the furthest dated call that you can find, for DIS At-The-Money Call.

For example, right now the furthest is 20th Jan 2017, $95 Strike price (ATM Call) for $13.20

Buying it is a synthetic way of owning 100 stocks of DIS at $95, till the date of 20th Jan 2017.

Then following covered call strategy, I will sell short term calls AGAINST my bought call.
The calls I sold would be short term, probably same as my covered call strategy, of 45days and renewing (closing old one and opening new 45days) it every 2 weeks.
I would be selling calls that is 1-2 strike prices away from ATM price.

So in essential, it is buying a long term call, and selling short term calls against it.

If DIS price moves up, your Long term Call would be appreciating in value as well. You may lose a bit on your short term calls, but you would be closing it and opening a new call when you renew, and would generate a net profits.
If DIS price moves down, you are still gaining more on time decay on the short term calls, than the losses from your long term call.

Its just like what the banks are doing, borrowing money short-term from deposits and lending it out long term.....

Let me know if you have done this, I shall be trying this strategy soon on DIS when I freed up some capital =)