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Estimating Our Breakeven Price Points When Establishing Our Poor Man’s Covered Call Trades: A Real-Life Example with Apple, Inc. (Nasdaq: AAPL)

When initiating our Poor Man’s Covered Call (PMCC) trades, we can estimate our breakeven (BE) price points. It gets more complicated as more layers are added to the trades over the months and, perhaps, years that the trade continues. This article will detail the formula used to generate this BE price point and use a real-life example with AAPL.

 

What is the Poor Man’s Covered Call?

This is a covered call writing-like strategy where a long-term expiration option (LEAPS) is used as a surrogate replacement for a stock or exchange-traded fund (ETF). This is technically known as a long call diagonal debit spread.

 

The rationale for calculating our initial breakeven price point first prior to establishing our PMCC trade

We ask ourselves what the cost will be if we enter and close our trade, and this will represent our BE price point. The security will be bought at the long call’s (LEAPS) strike price, the exercised price.  This is debit #1. We also must add to this the cost to enter the trade which is the premium paid for the long LEAPS position less the initial short call premium credit. The total of these 2 debits will represent our BE price point.

 

The actual formula

[LEAPS strike + (cost of LEAPS – initial short call premium)] = BE

 

Real-life example with AAPL

  • 5/19/2022: APPL trading at $137.35
  • 5/19/2022: Buy 1 x 6/21/2024 $85.00 LEAPS at $60.97
  • 5/19/2022: STO 1 x 6/22/2022 $145.00 call at $2.65

 

Calculating BE with the BCI PMCC Calculator

AAPL: BCI PMCC Calculations

 

  • Green arrows represent the data used in the calculation formula
  • The red arrow shows the final BE price point of $143.32

 

Discussion

The price at which a PMCC trade will result in no profit or loss can be estimated when the trade is first established. The data required is the strike and price of the LEAPS as well as the short call premium. The BCI PMCC Calculator will facilitate these calculations.

 

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Option Basics (I)…………………………………………….………….5 – 19

 

Stock Selection (II).…………………………………………………..20 – 42

 

Option Selection (III)…………………………………………………43 – 59

 

Exit Strategies (IV):……………………………………………………60 – 115

 

Special Circumstances (V)……………………………………..……116 – 134

 

Strategy Overview……………………..……………..……………….135

 

Additional Information…………………..………………………….136

 

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1.A Streamlined Version of Covered Call Writing: Introduction to premium members

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Topic related to multiple applications of selling cash-secured puts.

Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash-flow. This presentation will detail how to craft the strategy to multiple applications which will align with various goals and personal risk-tolerances. Topics included in the webinar include:

  • Option basics
  • The 3-required skills
  • 4-practical applications
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    • Buy a stock at a discount instead of setting a limit order
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Covered Call Writing Dividend Stocks to Create a 3-Income Strategy + A Streamlined Approach to Covered Call Writing

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Alan speaking at a Money Show event

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

About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

16 Responses to “Estimating Our Breakeven Price Points When Establishing Our Poor Man’s Covered Call Trades: A Real-Life Example with Apple, Inc. (Nasdaq: AAPL)”

  1. Stu March 4, 2023 4:00 am #

    Alan,

    When setting up our covered call trades, what would you say is the best delta to use? I’ve heard 35 and 40 are the best?

    Thank you.

    Stu

    • Alan Ellman March 4, 2023 12:07 pm #

      Stu,

      This is a question that comes up quite a bit and the answer is that there is no single Delta that will apply to all covered call trades for every investor.

      For example, if we are using traditional covered call writing in normal and bull markets, Deltas in the 35 – 40 range may be appropriate. If we are taking a defensive approach to our covered call trades, ITM strikes with Deltas between 50 -100 are most appropriate, as the intrinsic-value of those strikes will provide additional protection to the downside. If we are taking ultra-low-risk portfolio overwriting approaches Deltas above 75 are most appropriate. These are a few examples.

      Bottom line: When we structure our covered call writing trades, we must first identify our initial time-value return goal range, personal risk-tolerance and overall market assessment. Those factors will lead us to the best strike price based on these parameters. That strike will, in fact, have a Delta, but that Delta stat is our end point, not our starting point.

      We craft our covered call trades based on the above factors, not on achieving a specific Delta.

      Alan

  2. Syed March 4, 2023 7:34 pm #

    Hi Alan,

    I have purchased the Cashing In Covered Call book from amazon.ca recently. In the book you suggested to select stocks primarily from the IBD 100 list. I have browsed IDB website and did not found a IBD 100 list. Do you have an alternative suggestion? IBD website now have something like IBD 50 but I am not sure if IBD 100 and IBD 50 are meant to be of similar kind. I will appreciate your reply.

    Thank you,
    Syed

    • Barry B March 4, 2023 9:35 pm #

      Hi Syed,

      IBD has changed its lists in recent years. The IBD 100 is no longer published. They now publish the IBD 50. Since that change, we review the IBD 50, the IBD Big Cap 20, IBD Sector Leaders, and 4000+ additional stocks.

      I hope this help.

      Best,

      Barry

  3. Barry B March 4, 2023 9:30 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 03/03/23.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    https://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  4. JP March 5, 2023 3:04 am #

    Hi Alan,

    Hope all is well.

    Is there a quicker way to scan for an option’s Delta? For a prospective Put I go to TDA and look up Option Chain and then Greek / Analytical but it is pretty time consuming if I have a list of stocks I a researching. Is there a better / quicker way to do this?

    Thanks, as always.

    JP

    • Alan Ellman March 5, 2023 7:16 am #

      JP,

      There are vendors that offer Greek information (including Delta) within the option-chains. As an example, here is a link to a free site from cboe.com:

      https://www.cboe.com/delayed_quotes/aapl/quote_table

      You may have to click “I agree” to access the information.

      Alan

    • Barry B March 5, 2023 1:04 pm #

      JP,

      You can easily set up “Greeks” to display in your options chain within the TD platform. You can refer to the help videos on the site to show you how.

      Best,

      Barry

  5. Daxes March 5, 2023 7:17 am #

    Alan,

    I have the premium service. the screen stocks are part of your covered call strategy. Is there another list for writing puts?

    Daxes

    • Alan Ellman March 5, 2023 9:20 am #

      Daxes,

      Our stock and ETF Reports apply to both strategies. The requirements are precisely the same.

      I have been using these screens successfully for both strategies for more than 2 decades.

      Alan

  6. William March 7, 2023 2:45 am #

    Hi Alan,

    I have 1 question on covered call, some of my friends like to use “short put” to replace “covered call”. They think they can more easily use the fund. They are try to avoid holding any stock on hand.

    After assigned, they usually sell the stock and open the short put. What do you think about this method to replace covered call ? Do you have any YouTube to elaborate this scenario ? Thanks in advance for your help.

    Best regards,

    William

    • Alan Ellman March 7, 2023 6:23 am #

      William,

      Both covered call writing and selling cash-secured puts are wonderful, low-risk option-selling strategies that place us in a strong position to beat the market on a consistent basis, as both lower our cost-basis.

      I have multiple portfolios for my options strategies, some selling puts, most writing covered calls. The latter strategy allows us to take advantage of share appreciation in normal to bull markets by writing out-of-the-money strikes. When selling puts, our only income stream is from the put premium, unless exit strategy adjustment are implemented.

      For those new to options, I suggest starting with covered call writing because it is more intuitive and easier to learn. Once mastered, then move to put-selling.

      Once both strategies are mastered, we can then move to a multi-tiered option-selling strategy known as PCP (put-call-put) also called the “wheel” strategy outside the BCI community. Here’s a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/using-the-put-call-put-pcp-strategy-to-create-downside-protection-on-steroids/

      Alan

      • William March 7, 2023 10:48 am #

        Hi Alan,

        Thanks for the quick response.

        Best regards,

        William

  7. Alan Ellman March 8, 2023 5:18 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  8. Doug March 10, 2023 2:44 am #

    Alan,

    I just joined as a premium member today due to my specific interest in the PMCC. I purchased the PMCC calculator and have a question about the Initial srtucuturing Criteria?’.

    I would like to know (besides the calculation) what is the purpose of its calculation and resulting answer YES or NO? In experimenting with several stocks, I found it very difficult for my setups to result in a YES answer. Please check this and help me understand it.

    Thanks!
    Doug

    • Alan Ellman March 10, 2023 7:07 am #

      Doug,

      Glad to help.

      The trade initiation formula:

      [(Difference between the 2 strikes) + initial short call premium] > Cost of long LEAPS

      This way, if we are forced to close the trade early due to significant share appreciation, we close at a profit.

      The spreadsheet will show a bold YES or NO.

      If no, the typical reason is the high time-value component of the Deep ITM LEAPS.

      To get a “YES” use deeper ITM strikes that will have lower time-value components and then you will generate a “YES”

      Alan

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