The Poor Man’s Covered Call (PMCC), also known as a long call diagonal debit spread, is where deep in-the-money (ITM) LEAPS options are used in place of the long stock position. As with all strategies, the PMCC has its advantages and disadvantages but the main reason this strategy appeals to retail investors is that the cost to enter this trade is much less than a traditional covered call trades. Options cost less than stocks.

 

Selecting the best Delta for our LEAPS options

The reason we use deep ITM LEAPS strikes is because the closer to a Delta of 1, the more the price movement of the option will mirror that of the stock. Therefore, the BCI guideline is to use a Delta of .75 or higher for our LEAPS strike. Since there will be several strikes to select from, we factor in the following:

  • Cost of LEAPS must align with our portfolio cash available
  • The strike selected must align with the BCI initial trade execution required formula
  • The initial time-value returns must coincide with our stated goals

 

Real-life example with Intel Corp. (NASDAQ: INTC)

On May 18, 2020, INTC was trading at $58.30 and the $60.00 6/19/2020 $60.00 call option had a bid price of $1.75. The LEAPS option chain for the 1/21/2022 expiration showed 8 eligible deep ITM strikes with Deltas ranging from 0.779 to 0.9059:

 

INTC LEAPS Option-Chain

 

  • Purple cells: Cost of LEAPS
  • Yellow cells: Delta of LEAPS
  • Brown cells: Strikes of LEAPS

 

Initial trade calculations using LEAPS $35.00 strike with the BCI PMCC Calculator

 

INTC PMCC Calculations with the BCI PMCC Calculator

Blue cells (top of spreadsheet): Option-chain information entered

Green cells: Key calculation results

  • Initial trade formula acceptable with a net credit of $1.20 per share
  • Initial 1-month return on short call is 6.85%
  • 1-month initial upside potential is 6.65%
  • Total maximum 1-month return is 13.50%, 154.02% annualized

Pink cells: Exit strategy buyback points

 

Discussion

Delta is important with the Poor Man’s Covered Call strategy because we want the security to simulate the price movement of the underlying stock. There are several parameters that must be adhered to achieve the best trade results. The BCI PMCC Calculator is particularly helpful in establishing these trades.

 

For more information of the PMCC

BOOK

CALCULATOR

ONLINE VIDEO COURSE

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Barry,

Please know, and pass on to Alan, just how important you and the staff are, and how much I enjoy and respect each and every blog post, Ask Alan video and trade summary you send us.

Thank you!

Jim and Donna

 

Upcoming events

1.The Mad Hedge Traders and Investors Summit

Wednesday December 2nd at 11 AM ET

“The PCP (Put-Call-Put) Strategy”: Selling cash-secured puts to enter covered call trades

Register here for free

 

2.Stockcharts.com “The Final Bar” with David Keller: Interview 

Thursday December 17th

6 PM ET

Link to access the interview

 

3.Wealth365 Summit

January 18th – 23rd, 2021

Information to follow

 

4.Long Island Stock Investors Group

February 9, 2021 at 7:30 PM ET

Zoom webinar- details to follow

 

5. AAII Research Triangle NC

April 10,2021 at 10 AM ET

Zoom webinar- details to follow

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

****************************************************************************************************************