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Bull Spreads 105: The "Stock Substitute" Strategy

Why spend $5,000 buying stock when you can control the same upside for $1,000? We explore using Deep ITM Bull Spreads as a capital-efficient alternative to Covered Writes.

Feb 17, 202612 min read

The Capital Efficiency Hack

Imagine you want to do a Covered Call on XYZ ($50). You buy 100 shares ($5,000) and sell the $55 Call.

Alternative: Buy the Deep ITM $35 Call (Delta ~0.95) and Sell the $55 Call.

This is a "Conservative Bull Spread" (ITM/OTM).

Cost: Maybe $1,200 instead of $5,000.

Result: You have almost the exact same profit profile as the covered call, but you used 75% less capital.

Key Benefit: You can put the remaining $3,800 into T-Bills or a High Yield Savings Account. This "Interest Bonus" often outperforms the stock's dividend.

Stock Repair Strategy

What if you are already stuck in a losing stock position? (e.g., Bought at $50, stock is now $40).

You can use a spread to "Repair" the trade.

The Move: Buy 1 Call at $40, Sell 2 Calls at $45 (Ratio Spread).

The book details how this lowers your breakeven point significantly. If the stock rallies to $45, you recover your losses much faster than just holding the stock.

Conclusion of the Series

Bull Spreads are the Swiss Army Knife of bullish strategies.

Use OTM spreads for speculation.

Use ATM spreads for growth.

Use ITM spreads for stock replacement.

By defining your risk and reducing your cost, you survive long enough to let the probabilities work in your favor.

Key takeaways

  • Deep ITM spreads mimic Covered Calls with massive capital savings.
  • Invest the saved capital to generate risk-free yield.
  • Use spreads to repair broken stock positions.
  • This concludes the Bull Spread Masterclass.

Series

Bull Spread Masterclass

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