A typical Poor Man’s Covered Call (PMCC) trade involves buying a deep in-the-money call LEAPS option and selling short-term out-of-the-money call options which is protected by the long LEAPS position. In April 2020, Martin shared with me a PMCC trade he executed with PPL Corp. (NYSE: PPL) where share price declined below the LEAPS strike during the coronavirus crisis of 2020. This article will evaluate the initial trade set-up and management opportunities.
Martin’s PMCC trade initiation
- 2/20/2020: PPL trading at $35.42
- 2/20/2020: Buy the $30.00 LEAPS 1/15/2021 call for $5.70
- 2/20/2020: Sell the 3/20/2020 $36.00 call for $0.30
BCI PMCC Calculator: Initial Trade Tab
PPL: Initial Trade Calculations
The initial trade formula is satisfied:
- Difference between the strikes + initial short call premium > cost of LEAPS
- ($36.00 – $30.00) + $0.30 > $5.70
- The initial time-value return on the short call is 5.26%
- The initial upside potential is 10.18%
Price chart of PPL during the coronavirus crisis
PPL Price Chart as of 4/9/2020
Share price dropped below the LEAPS $30.00 strike and was at $26.70 on 4/9/2020. Keep in mind that the original short call expired on 3/20/2020.
Exit strategy choices
We must first decide if our bullish assessment of the stock changed? In this case, it is fair to conclude that the stock price declined as a result of the overall market downturn. If we determine that the issue was company-related, we close both positions, take a loss and move on. In this case, we view this scenario as a price gap-down that was market-related and we roll-down to out-of-the-money strikes. This will allow us to generate additional time-value premium while, at the same time, allow for some share price recovery. Between 2/20/2020 and 3/20/2020 there were multiple opportunities to roll-down and once the March contracts expired, we can continue to write out-of-the-money short calls as share price recovered.
Discussion
When implementing the PMCC, we must first make sure the trade initialization formula is achieved. This now moves us into position management mode as with traditional covered call writing. The active leg of the trade is the short call. Our entire arsenal of exit strategies is available including our 20%/10% guidelines.
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Hi Alan
How do I figure out the ROO when there is no Time Value?
I am going to roll out and up my Oct 16 QQQ strike of 279 to Oct 30 283 strike (.31 credit) or 285 strike (.99 debit).
Thanks
Donna, premium member
Donna,
Use the “What Now” tab of the Basic Ellman Calculator, Elite Calculator or Elite-Plus Calculator to generate the ROO stats for rolling the option out-and-up. We must factor in the amount of unrealized share appreciation inherent in the trade.
For the $283.00 strike it would be + $4.00; for the $285.00 strike, it would be +$6.00. Then the option credit or debit is factored in based on a cost-basis of $277.00 which is what the shares are worth prior to rolling. Let the calculators do all the leg work.
Alan
Hello Alan and Barry (from Friday afternoon),
I am a premium member and I think your educational content is great. I am just starting to practice the BCI method writing covered calls and will be paper trading this November expiration picking stocks from your weekly report. I have executed covered calls using a different method and I am currently in an Apple covered call using the Oct16 expiration which expires today.
I bought AAPL on 9/25/20 at $110.87 and sold the $120 Oct16 Call at $1.67. This resulted in a 1.5% ROO with an 8.2% Upside for a total 9.7% return if Apple remains above $120 at the close of today.
I am looking to roll this trade out to the Nov20 expiration to the $130 strike which could give me a total 9.83% return of which the ROO is 2.09%). I realize earnings for AAPL is on 10/29/20 and that I should not roll out because of this. My reason for doing so is because I am looking at APPL for a long term position and will keep it no matter what happens at earnings.
After all of that being said, my question has to do with the October expiration trade. Will I keep the 9.7% return from the October trade when I roll? I believe so because any cost on the BTC is subtracted from the November premium and is reconciled there and not affecting the October trade, correct? I also realize that the numbers I have stated for the roll will change as this expiration day progresses.
Also, since the price of AAPL is so close to my October strike, I’m waiting to see in case AAPL drops below $120 in which case I will just let it expire worthless and then write the $130 November Call on Monday. Do you have any insight as to when you would roll if it looks like AAPL will be closing above $120? Earlier in the day rather than later? The deeper in the money the trade is will mean a higher cost to buy back the $120 Call but doesn’t that get negated by the higher value of the stock price?
I also attended last nights webinar and thought is was great. Thanks to both of you and the BCI team for all that you do.
Thank You,
Alan K
Alan,
Congratulations on a successful trade. Some considerations:
1. Although AAPL closed at $119.02, rolling the option makes sense since the price was > $120.00 a hour or two prior to closing. I typically start rolling my options about 2 PM ET so I can comfortably execute all my trades prior to 4 PM ET.
2. The time-value cost-to-close will be small on Friday afternoon and your unrealized total profit will be close to 9% in 3 weeks. Yes, the intrinsic-value cost-to-close in negated by share appreciation when the strike expires in-the-money.
3. Give strong consideration to selling weekly options that expire prior to the earnings report, skip the week of earnings and then start re-selling options. Since AAPL is a long-term holding, the stock can remain in your portfolio but without a call obligation in place the week of earnings.
Thank you for your generous comments.
Alan
Alan,
Another alternative you might want to think about is to use weeklies as Alan suggested. However, you might want to think about a protective put and turn the trade(s) into a Collar. This will give you downside protection, especially in the higher volatility environment that the electoral process will introduce.
Best,
Barry
Hello Alan,
Thank you for the feedback on my AAPL trade. Great advice on using weekly expiration instead of the monthly until the earnings date passes. As I was looking at the weekly Oct23 chain I see that the $125 strike is currently selling for $0.67 and was setting it up in the Ellman calculator. I used Friday’s closing price of AAPL as the “Stock $/sh” and wanted to make sure that’s what I should use when rolling or moving into the next covered call trade? I would not continue to use the price when I entered the initial trade which was $110.87, correct?
Using $119.02 for the stock price and $0.67 for the $125 strike my ROO calculates to 0.6% which extrapolates out to 2.4% on a monthly basis which passes my 2% minimum monthly criteria. The $130 strike only gives me 0.2% for the week or 0.8% on a monthly basis, too low for my goal.
Going with the $125 strike, my concern is that it may be ITM by the end of the week in which case I would just need to roll the trade. At this point I would not enter another covered call trade until after the Oct29 earnings report. My question is would I continue to use weekly expirations for the rest of the Nov20 expiration period or go directly to the Nov20 monthly expiration?
My feeling is that you’re going to recommend analyzing both the weekly and monthly options at this point but maybe you would go directly to the monthly to allow time for some of the other exit strategies. Also, I would like to confirm that I would use the price of the stock at the time of the roll and not the price of my initial trade at $110.87.
Thank you for your feedback.
Alan K
Alan,
You are correct. When rolling an ITM strike, we do not use the original purchase price of the stock but rather the current value at the time of rolling which is typically the strike of the near-month option.
In most cases, once the report passes and post-report volatility (if any) subsides, we use Weeklys until the end of the current contract month and then back to Monthlys for the new contracts if that is our preference (it is mine). We should also factor in post-election activity this year.
To confirm, when we roll an ITM strike, we use the near-month strike price as our cost-basis because that is what our shares are worth. If we had sold a $50.00 call and the stock price is $52.00 as we are about to roll, we use $50.00 as our cost-basis. The calculator will do this for us.
Alan
Hello Alan,
Thank you for a great presentation on Thursday. I was commuting home when I was watching it and missed a small portion of the initial presentation. I believe Barry mentioned it would be recorded and made available to watch again. Do you know if this is the case?
Also, I was just curious for your opinion on using TAN ETF for covered calls. I am looking at the 11/20 $70 ITM call with 36 days to expiration. To me it seems the premium is favorable with a nice ROO along with downside protection. Do you make use of ETF’s often in your portfolio? This seems like a good strategy to me.
Thank you for any comments you might have and always for your time. Have a nice day.
Patrick
Patrick,
A few comments…
-ETFS are a great underlying security to use with your covered call trading
– Our Weekly ETF Report is a great source for ETF trading candidates
– As for TAN…I have been trading it since it appeared on the ETF report. Originally, I was thinking about trading the stock SEDG. However, since I am very conservative, I checked TAN’s holdings and found that SEDG was a sizeable part of TAN’S holdings. This gave me the opportunity to participate in SEDG in a more conservative manner.
– The above is not a recommendation to buy or sell any security. Please seek the advice of a licensed advisor. The discussion was meant to answer your question with a different approach.
Best,
Barry
Alan;
In the above example of managing a PMCC, were there no adjustments made to the long LEAP? To be clear, the short call is rolled down, even if the short call strike is below the long LEAP strike? If this is the case, are you no longer covered?
Best regards;
Terry
Terry,
Let’s assume the $36.00 strike expires worthless and we then write an OTM $28.00 call assuming our bullish assumption has not changes. We continue to write OTM calls if share price recovers. In this case, the strategy would have been successful as we saw a spike back up post-March decline. If the new strike is expiring ITM, we can roll that option to avoid exercise.
Let’s look at the other side if we decide to close that second trade or if the new short call is unexpectedly exercised early (rare). We buy at $30.00 and sell at $28.00, a $2.00 per-share loss which we have to pay for. In our BCI methodology, we have cash set aside for exit strategy execution and this can be the source of the short fall. We should check with our online brokers to see how these rare situations are managed.
Alan
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 10/16/20.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Since we are starting Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/
On the front page of the Weekly Stock Report, we now display the Top 10 ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Hi Alan,
In your latest “BCI Weekly Stock Screen and Watch List” report date of 10-16-2020 sent to me tonight (Saturday) you stated as follows….
“I will be moving to 80% cash prior to the election using Weekly options to that point. I will favor deep OTM puts targeting a 0.3% to 0.4% (30 to 40 basis points) 5-day return with Delta’s of 10 or less.”
Question #1. To specifically clarify does this mean?: You will favor “selling” deep OTM Weekly “cash secured” puts targeting a 0.3% to 0.4% 5-day return with Delta’s of 10 or less?
Please note: I have added the terms “selling” and “cash secured”. Is this correct? Alan, I am new to puts, but understand Weekly’s and Delta’s.
Question #2. To specifically clarify for me, does this mean:
Do you plan to have 80% of your portfolio in non-earning and non-securing “cash-cash” sitting on the portfolio sidelines or in some sort of a 5 basis point market money fund and then 20% of your total portfolio in cash as the total cash securing the deep OTM Weekly puts?
This plan would be in place until the market settles post-election and then you will more than likely return to more traditional option-selling.
Thank you as always!
P.S. As of Friday’s stock market close I reverted to 75% in cash, having intentionally ended the 10-16-20 expiration date with numerous stocks/ETFs’ options slightly ITM…. thus, 75% of my total portfolio was exercised on Saturday afternoon (today) to cash. Therefore I was very pleased to read the BCI comments.
Tay
Tay,
My responses:
1. Yes, selling DOTM cash-secured puts. I like your phrasing better than mine. I recently published an article on this strategy:
https://www.thebluecollarinvestor.com/selling-deep-otm-cash-secured-puts-with-exit-strategy-enhancements/
2. Yes, 80% of my cash allocated to stocks and options will be snoozing in an account where we need a magnifying glass to see the interest accrued… but safe.
3. I also allowed my short calls to be exercised and also pleased with the results for the October contracts.
Keep up the good work.
Alan
Alan;
For your DOTM CSP’s, are you looking at AAPL again or using candidates from the weekly run list?
Best regards;
Terry
Terry,
Yes, AAPL is one of the securities I plan to use when I enter my trades today. It is currently one of the eligible stocks in our recent Blue Chip Report. This is not a specific recommendation but rather sharing of information.
Alan
Alan,
I am a new subscriber and noticed that there are some great companies like PG and MO that are not on your list.
Do you only look at the IBD top stocks?
Thanks
Bill
Bill,
In addition to the IBD screens, we also use the BCI database of thousands of securities we have identified over the years as potential option-selling candidates. It takes 10 – 15 hours after market closes on Friday to accomplish this screening methodology.
PG is one of the eligible securities on our recent Blue Chip Report and MO does not meet our screening criteria at this time.
Alan
Good evening Alan,
It has been several months since receiving and reading your book on covered call writing, and a few months since becoming a member of the BCI community.
I have been studying the weekly stock screen and watchlists sent to me and have a question about the most recent one.You have mentioned the use of deep OTM put options pre election. From a purely educational perspective what is your feeling of selling the 10/23/20 114 put for BBY the closing price on Friday was 119.35 and the bid – ask is .34-.44. the 20 day ema is 114.28 slightly above the option strike of 114.
If the option is sold for .37 slightly above the bid price a .32% five day return would be obtained. $37/$11400. the delta is .12 but the open interest is a meager 17. Any feedback would help me toward my goal of becoming a successful trader.
Thanks Allan
Allan,
BBY is an eligible security in our latest stock report and has been for 4 consecutive weeks. I would wait until later this morning to evaluate the put premiums, bid-ask spreads, open interest and Deltas before making a final decision. I usually enter my new trades (aside form exit strategies) between 11 AM ET and 3 PM ET.
We must define our strategy requirements before making final trading decisions. I am currently using 5-day initial time-value return goals of 0.3% – 0.4% with Deltas of 10 or less.
Open interest generally is lower for Weeklys than Monthlys. For BBY, we would expect the OI to be reasonable once trading begins later this morning.
Alan
Hi Alan,
New member. Love you information.
I have read site and noticed on your videos that you mentioned Delta.
I have done some readings, I am trying to grasp the definition.
I was also trying to figure out –
Is this a metric one can find on a site ie Yahoo Finance or does one have to calculate each time?
If I have to calculate what is the formula you use or recommend?
Do you have calculator on your Premium Member site.
Thanks.
Ketan
Hi Ketan,
No need to worry about calculating Delta. This “Greek” is available in the options chain display on every broker platform. Depending on your broker, you might have to look at the option chain display settings to show it, but it is straight forward. When I first started to trade options, I called my broker to walk me through getting it displayed.
Best,
Barry
Hey Friends,
If Alan and Barry think it is appropriate a new blog this weekend could be about how everyone is trading the election?
I am trying as hard as I can to not sell stuff. But it’s just a mouse click in my IRA to go flat on SPY and QQQ. All my current options trades expire Oct 30th. We shall see after that.
We are not a politics web site. I hope everyone votes and may the best candidates win. But we are a trading web site and the election is a pivotal event. I am interested in hearing how others are trading it. – Jay
Hi Jay,
My personal game plan is to:
– Get “skinny” going into the election…80% to 90% cash at the end of the week
– Using conservative Weeklies per Alan’s plan for some small gains
– For the very few stocks that I plan to keep, I will be turning those into “Collars” by purchasing protective puts at my breakeven point. So even if things fall quickly, I’ll be at breakeven. If the market behaves in a more rational manner, I’ll have a small win on that stock.
– Some aggressive traders I know are buying VIX calls, and SPX puts…however, that is NOT my plan.
Net/net, I’ll be hiding from Mr. Market.
Best,
Barry
Hi Jay;
I also am trying to hide from Mr. Market as best I can. Have gone to mainly cash, bonds and precious metals and will take a wait and see approach until after the election.
Best regards;
Terry
Thank you Barry and Terry for your kind and helpful replies.
I ended up cash heavy after Friday’s Oct. expiry since I had a lot of csp’s on things I would like to own some day that went out full profit in a solid month. So on yesterday’s dip I sold more of the same for Oct 30 expiry. Gotta’ love those weeklies :)!
Going into the election I will probably buy call verticals on the VIX. Barry, I will make them spreads with a sold call component that may cap my upside but, as you know, it dampens theta decay in the steep part of that curve while I hold them.
Cash is probably King now. But the good news is the market never crashes when everyone is cautious and/or on the sidelines. It crashes when everyone is all in throwing huge parties :)! I don’t sense any of that now. – Jay
Hi Jay,
Just to clarify, I am not buying VIX calls…some of my trading friends are. I’m going to keep it simple…
Best,
Barry
Got it Barry, thank you for the follow up!
I don’t think buying VIX calls is a bad idea into the election. I do suggest if one plays VIX use the measure itself since the futures derivative products like VXX and UVXY are hindered by contango.
Perhaps a more straight forward way to play a possible election drop in the market is to sell cash secured puts on GLD and TLT if you would not mind owning those if wrong? – Jay
Hey Guys,
I have erroneously been at about 40% cash since March. Except for one bank I sold everything but tech. So my account has done very well even though I was at 40% cash and because of the run up in tech the same cash is now only 31% of my account.
My initial plan was to be in 100% cash at the end of this month.
I am 78 and have traded stocks since 1982. It has been my experience that the market will correct when it’s overbought or oversold (P/E too high or too low) but the really steep drops are related to uncertainty. I believe the market has reduced the amount of uncertainty about the election. I believe the market believes that stimulus will come by the boatloads in Feb. Some uncertainty remains about the possible transfer of power.
On the other hand, the FED is underpinning the market as best it can, and it can very well. Financially, the market is the only game left. The acronym is TINA, there is no alternative.
To wrap up I believe I will stay with COVID19 positive issues, mostly tech, and maybe hedge by buying OTM puts on SPX.
Hoyt T
Alan,
Please update your next release of the ETF report list to show that TAN has Weekly options.
Mario
Thank you, Mario.
Alan
Alan,
I HAVE A QUICK QUESTION ARE THERE ANY ADVANTAGES OR DISADVANTAGES IN BUYING OR SELLING WEEKLY OPTIONS ONE MONTH IN ADVANCE? I ASSUME PEOPLE INITIATE A WEEKLY OPTION IF THEY PLAN TO BE IN THE TRADE FOR A WEEK OR LESS BUT WHAT IF YOU ARE GOING TO BE IN THE TRADE FOR 2-4 WEEKS?
THANKS,
MARK
Mark,
Not all stocks with options have Weeklys. For those that do, we can choose any time weekly frame. I find it more manageable to have all my positions expiring on the same date but that is my personal preference, not a rule or guideline.
Alan
Alan,
I watched one of your Ask Alan videos last night on implied volatility. Excellent You explained that it is based on 1 year and how to calculate IV during a contract. I am curious if we can use IV to predict a 1 day price change?
Thanks a lot.
Marsha
Marsha,
Yes, but I would replace “predicted” with “expected”.
It’s called the “Rule of 16” We divide the IV by 16 to get the expected 1-day price change. For example, if s stock has an IV of 32, the average expected 1-day price change is 2%
“16” is used because it represents the square root of the # of trading days per calendar year.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly option and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
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Alan and the BCI team
Hey Jay,
your question is challenging.
I am 50% in cash and 50% invested in the 11/20 cycle CC trades.
This is a 5-week cycle, and I will probably be fully invested by the end of this week or early next week.
My reasoning is that the election will not change the stock market significantly with the resulting outcome.
I believe and hope that the COVID pandemic will be over soon, and I have a watchlist named Postcovid Tickers, containing stocks the could rebound, such as BA, DIS, CCL…..
As the institutionals, who are the ones who move the market, are always looking forward to long term investments, there will certainly be a rebound in the most affected industries.
Maybe I should be more careful, like Terry and many others, and stay in cash until these events are resolved, but as Hoyt says, the market is the only game left, and I am willing to risk it, and if necessary, apply the BCI exit strategies if I am totally wrong.
Wish me luck – Roni
Thanks Roni, as you well know I always wish you and all friends here the best of luck!
I love your idea of a list of “Post Covid Tickers” – you are thinking ahead! In hindsight I wish instead of panicking and buying some inverse ETF’s early in the year I had sat back and thought “OK, now everyone is at home and can’t go to the office. What will benefit from that?”
It would have led me to the remote meeting, internet commerce, home delivery and exercise equipment stocks that have gone to the moon.
Yours is also a helpful perspective on the US election since you don’t live here. We in the States tend to get too wrapped up in our own affairs and lose the bigger picture.
I can second Hoyt’s observation: whatever happens post election tends to even out before too long. So staying invested in long term accounts and building cash in short term trading accounts both make sense. – Jay
That is the idea Jay,
Here are some more from my list MGM, LVS, AAP, MSFT, ULTA….. but they have earnings scheduled shortly.
I am considering PII 11/20 CC trade next week after ER confirmed for 10/27.
Roni
Hi Alan
Good evening. Iam glad to see your YouTube video on ‘selling put option’ strategies.
In your trade you sold AAPL put and gained good amount of annual returns around 20%. However we need collateral equivalent of 100 AAPL stocks.
But how can I play with 2K in my account?
I like your way of teaching.
Thanks
Satish
Satish,
You are correct. AAPL is not an appropriate security for option-selling with $2k available. It would have to be a stock trading under $20.00 per share.
You may want to consider building up portfolio net worth prior to low-risk option-selling strategies. That’s what I did when I started self-investing. This way, we can be well-diversified in our portfolios. To build up portfolio net worth, consider this book:
https://www.thebluecollarinvestor.com/stock-investing-for-students/
Alan
Hi Alan,
Concerning the 3% rule on selling cash secured puts… should we exit the trade at that 3% mark anytime during the one month contract period or should we wait to mid-contract before worrying about it? I am enjoying your books and the elite calculator so much!
Thanks so much and take care!
Joni
Joni,
The 3% guideline for selling cash-secured puts applies to any time during the contract. If a stock has declined down to the OTM put strike and then below, it is not behaving as our screening anticipated. It could recover but should we take that chance?
After we close, we use the cash to mitigate the small loss with another C-S put trade.
If the stock does recover, so be it. We still made the correct move at that time.
Alan
Alan,
For Weekly options, if you have a long position in the underlying, is the best time still to wait for Monday to sell a short call for the week, just like monthly options.
Mario
Mario,
Yes. The time-value erosion (Theta) has already been factored in by market-makers so there is no financial benefit to enter the trade on Friday. I have been selling deep OTM weekly puts recently and do so as 5-day trades. It’s been working out quite well.
Alan