Creating your own equity risk premium (2/2)

Peregrine
Apr 10
2 min read

OPTIONS! A stock trader's Meccano set.

Use these approaches when markets get expensive.

Here are some smart, downside-protected option strategies that mimic or beat ERP:

1. Buy-Write (Covered Call, for existing positions)

ERP angle: You’re monetizing implied volatility — harvesting yield by giving up some upside.

Setup: Buy 100 shares of a quality stock or ETF (e.g., SPY) + sell an OTM call.
Downside protection: Premium collected offsets some downside.
Use when: You’re neutral-to-mildly bullish and want to generate yield in a low-ERP environment.
Tweaks:
- Sell calls 5–10% OTM, 30–45 days out.
- Use weeklys for more frequent premium harvest if liquidity’s solid.

2. Put Spread (Bull Put Spread, for fresh capital looking to go long defensively)

ERP angle: You’re taking on defined risk to collect premium — mimics being long equities with built-in downside cap.

Setup: Sell ATM put, buy lower-strike put (same expiry).
Downside protection: Defined max loss = spread width minus net premium.
Use when: You want bullish exposure with built-in stop.
Example: Sell SPY 500 put, buy 480 put. Collect $5+ in premium.

3. Call Spread (Bull Call Spread, for taking some money off the table, not but wanting to leave the party too early. Asymmetry at your service.)

ERP angle: Pure directional bet with lower cost and capped risk — a cleaner, capital-efficient long equity proxy.

Setup: Buy lower-strike call, sell higher-strike call.
Downside protection: Limited loss = net debit.
Use when: You’re bullish but want to limit exposure in low ERP zones.
Example: Buy SPY 500c, sell 520c — cheap convexity play.

4. Collar (Chilling till the storm clears, recommended for old positions)

ERP angle: Classic synthetic ERP — own stock, sell call, use proceeds to buy downside protection.

Setup: Buy stock + buy put + sell call.
Downside protection: Put acts as a floor. Premium from call offsets cost.
Use when: You want long exposure but can't tolerate drawdowns.
Bonus: Tailor put-call strikes to suit risk appetite.

5. Cash-Secured Puts

ERP angle: You’re getting paid to wait — generate income for equity exposure only if you get the price you want.

Setup: Sell puts at strike where you’d be happy to own the stock.
Downside protection: None if assigned, + you collected premium. Really suggest going short if the bottom falls out
Use when: Valuations are high.

More approaches-

Strategy Stack — to Manufacture ERP Efficiently

Strategy	Market View	Risk Profile	Why Use It Now
Bull Put Spread	Bullish/Neutral	Defined loss	Create income with limited equity risk
Bear Call Spread	Bearish/Neutral	Defined loss	Income from overvalued market
Iron Condor	Range-bound	Lower max profit/loss	Double credit spread, ERP from both ends

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