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How to Adjust a Poor Man’s Covered Call (PMCC) Trade to Align with the BCI Trade Initialization Formula

The PMCC is a covered call writing-like strategy where LEAPS options act as surrogates for the underlying stock or ETF. It is technically called a long call diagonal debit spread and has the advantage of lower cost to enter the trade when compared to traditional covered call writing. Short (covered) calls are sold against this long LEAPS position.

What is the BCI trade initialization formula? 

When we structure our PMCC trades, we want to be sure that if we are forced to close both legs of the trade if share price appreciates substantially, we can close at a profit. The required formula is:

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

BCI PMCC Calculator

The Initial Trade tab is designed to let us know if the proposed trade meets the formula requirements, generating a YES or a NO. If the spreadsheet shows NO, an adjustment is necessary.

Rationale behind the PMCC adjustment to generate a YES

If the spreadsheet rejects the trade, it is typically because the time-value component of the cost of the LEAPS is too large and a different, lower strike LEAPS must be selected. The deeper in-the-money the strike, the lower the time-value component of the option premium.

Real-life example with Apple Inc. (Nasdaq: AAPL): Trade rejected

AAPL PMCC Trade Rejected

The time-value component of the $120.00 long LEAPS strike is too expensive, and we must try a deeper ITM strike.

Real-life example with Apple Inc. (Nasdaq: AAPL): Trade accepted

AAPL PMCC Trade Approved

Discussion

When crafting our PMCC trades, we must consider the possibility of significant share appreciation early in the trade cycle, forcing us to close both legs of the trade. To accomplish this, we turn to the BCI trade initialization formula or the 1st tab on the BCI PMCC Calculator. When the spreadsheet rejects the trade, we must try lower ITM strikes to decrease the time-value cost of the LEAPS until we read a YES in the spreadsheet. Yes, this will cost us more cash to enter the trade, but it also protects us from a potential loss even when we are directionally correct.

Premium Member Benefits Video: This is a great time to join our premium member community with its stock screening and educational (over 250 videos) benefits. We offer more benefits than ever before. For information, click here.

For video explanation, click here.

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail 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:

Alan,

Your tools will clearly give me the opportunity to better track and update the trades as necessary.

One thing I have certainly learned from BCI is to stay the course and use and believe in the exit strategies that you have developed.  I the past I would get out of trades too early and leave a ton of money on the table.

Thanks Again,

Bruce

Upcoming events

1. Mad Hedge Investor Summit

June 14th at 11 AM ET – 12 PM ET

Exit Strategy Choices After Exercise of Cash-Secured Puts

When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio.

This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted:

  • Selling the stock
  • Holding the stock in our long-term buy-and-hold portfolio
  • Write a covered call (PCP or “wheel” strategy)
  • Implement the stock repair strategy

In addition to these strategies, the following topics will also be included in the webinar:

  • Option basics for selling cash-secured puts
  • Option basics for covered call writing
  • Real-life examples
  • Calculations using the BCI Trade Management Calculator (TMC)
  • Event super discount offer

There will be information offered to all levels of options trades, from beginners to advanced.

Register for free here.

2. Your Mid-Year Portfolio Review Virtual Expo 

June 27th 11:20 AM ET – 12 PM ET

Ultra-Low Risk Approaches to Covered call Writing and Selling Cash-Secured Puts

Adding Delta and Implied volatility to existing defensive concepts

Covered call writing and selling cash-secured puts are low-risk, option-selling strategies focused on generating cash-flow. Our trades can be structured to represent aggressive or defensive postures or somewhere in between.

This presentation will detail how to structure our trades to decrease risk, particularly in bear and volatile market conditions while still generating significant returns. It will also be of interest to investors who have a low personal risk-tolerance but still want to generate higher than risk-free returns.

Both Delta (an option Greek) and implied volatility will be spotlighted, and real-life examples will be utilized to demonstrate the process of establishing these conservative trades, while still allowing us the potential to generate significant annualized returns.

Registration for free here.

3. Wealth365 Investor Summit

July 10th -11th

Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

  • Normal to bull markets
  • Bear and volatile markets
  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.

July 10th -11th

Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

  • Normal to bull markets
  • Bear and volatile markets
  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.

Register for free here.

Date and time to follow.

4. Orlando Money Show Live Event

October 29th – October 31st

Details to follow.

5. AAII Orange County, California Chapter

Saturday November 11, 2023

Details to follow.

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.

13 Responses to “How to Adjust a Poor Man’s Covered Call (PMCC) Trade to Align with the BCI Trade Initialization Formula”

  1. Mark June 3, 2023 1:12 am #

    Alan,

    I recently finished reading the Complete Encyclopedia and loved it and just started your book on puts. I was wondering if you prefer covered calls or puts? How about weekly versus monthly options?

    Thanks a lot,
    Mark

    • Alan Ellman June 3, 2023 6:46 am #

      Mark,

      I have multiple option-selling portfolios, some dedicated to covered calls, some to selling puts. Most use monthly expirations, a smaller percentage use weekly options.

      All the information I provide in the form of articles, books, webinars and videos are based on my real-life trading experiences. I have personally used all the strategy approaches presented by BCI. My hope is that this material will provide investors with the information required to make informed investment decisions that is in the best interests of their families.

      The greatest % of my portfolios is dedicated to traditional covered call writing with monthly expirations.

      Alan

  2. Barry B June 3, 2023 11:02 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 06/02/23.

    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]

    • Roni June 8, 2023 11:22 am #

      Hello Barry,

      I am unable to open the Weekly Stock Screen.

      It goes to the Acrobat page, and there is a blue circle stating 100%, but it does not go any further.

      Maybe it is something in my computer, but I do not know how to fix it.

      Have a nice weekend – Roni

      • Alan Ellman June 8, 2023 11:46 am #

        Roni,

        I sent over a direct email as how to resolve this issue. It is from your end and happy to help.

        Alan

        • Roni June 8, 2023 2:22 pm #

          Thank you, Alan,

          I just received your e-mail and the attached Weekly Stock Screen opened normally.

          I have been trying to open it from the BCI site each day since last Sunday and it did not work. I always check the Stock Screen for the best tickers to buy/write, and also for your comments about the market in the Weekly Summary.

          I will have to get some help from my technician to see what is wrong with my computer.

          Thanks again for your prompt help – Roni

  3. Barry R June 4, 2023 3:45 am #

    Alan,

    Regarding your diversification requirement, if I have >20 positions avoiding multiple stocks with same industry may not be feasible. Agreed?

    Thanks,
    Barry R.

    • Alan Ellman June 4, 2023 7:07 am #

      Barry,

      I absolutely agree that if we had 30 positions, we will not have 30 different industry groups. However, the concept of diversification should still be adhered to.

      For example, we would not want 20 of our 30 positions to be with Chips stocks. The report that was posted last night has about 15 different industry segments, so we can diversify into at least 10 of them, maybe more. If the report is not as robust as the current one, we can also turn to our ETF and Blue Chip (Dow 30) reports.

      Bottom line: By factoring in diversification, if 1 stock or industry takes an unexpected downturn, our portfolios will not be dramatically impacted.

      Alan

  4. Richard June 4, 2023 12:05 pm #

    Alan,

    I haven’t seen you say anything about selling weekly Call options.

    With their higher premiums and short durations,, they must be much more profitable than selling monthlies.

    Richard

  5. Alan Ellman June 6, 2023 6:03 am #

    Mad Hedge Investor Summit free registration link:

    June 14th at 11 AM ET – 12 PM ET

    Exit Strategy Choices After Exercise of Cash-Secured Puts

    https://www.madhedge.com/?source=aetbcic

    I’ll discuss the 3 paths we can take if we “allow” exercise of our cash-secured puts positions.

    Alan

  6. Alan Ellman June 7, 2023 7:57 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

    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

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