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Poor Man’s Covered Call: Practical Application

Covered call writing involves first buying a stock or exchange-traded fund (ETF) and then selling call options on those shares. Each contract we sell requires us to buy 100 shares of the underlying. This can be a challenge for some investors who may look for stock substitutes that will lower cost basis and risk. Enter the Poor Man’s Covered Call (PMCC).

 

What is the Poor Man’s Covered Call?

This is a covered call-like strategy where a long-term option (LEAPS) is purchased in lieu of a stock. Short-term calls are then sold against the LEAPS. The long call gives the option buyer the right to buy the shares at the strike price by the expiration date. Options cost a lot less than shares of stock so the cost basis and cash required are reduced as is the risk. The technical term is called a long call diagonal debit spread (simultaneous purchase and sale of equal number of options of the same class, same underlying security with different strike prices and different expiration months).

 

Level of trading approval

Although this strategy simulates the conservative covered call writing strategy, our brokers will require a higher level of trading approval for “spread trading” Check with your brokerage to see what those requirements are and evaluate your ability to meet those prerequisites.

 

Pros and cons compared to traditional covered call writing

covered call writing strategies

Pros and Cons of Poor Man’s Covered Call Writing

 

Best underlyings to consider

Since this is more of a long-term commitment than traditional covered call writing (it’s more like portfolio overwriting) we are more likely to consider blue chip stocks like those found in the Dow 30, for example. ETFs with similar underlying qualities (like the SelectSector SPDRs, for example) can also be considered. For our initial setup, low beta stocks in a low volatility environment will establish the most solid foundation to initiate these trades.

 

How a trade is initially structured

Here is the formula:

Difference between the 2 strikes + premium generated from the short call > cost of LEAPS

If we follow this formula, if the trade is closed after share price moves up quickly, we will close at a profit.

Hypothetical example when setting up the initial trade

  • Stock BCI is trading at $50.00
  • Buy $45.00 LEAPS (more than 1 year out) for $6.00
  • Sell $52.00 1-month call for $2.00
  • Difference between strikes = $7.00
  • Initial premium for short call = $2.00

Feeding this information into the formula:

[($52.00 – $45.00) + $2.00] > $6.00

$9.00 > $6.00…all systems go.

 

Strike price selection

Long call: Favor far-out expirations with Deltas above .75 (the deeper in-the-money, the higher the Delta).

Short call: Favor out-of-the-money strikes that meet our monthly goals. The time value (also called extrinsic value) of the initial short call should be greater than the time value we pay for the LEAPS

 

Position management

Much like traditional covered call writing the short call must be closed before selling the long call to avoid a risky naked short options scenario. Most management will be on the short call side involving rolling down, rolling out and rolling out-and-up. We have our 20%/10% guidelines in place as with conventional covered call writing and we still factor in earnings reports and ex-dividend dates.

 

Earnings reports

No matter what form the underlying takes, earnings reports are still risky. Since almost all stocks with LEAPS also have Weeklys, we can write calls 48 weeks of the calendar year and avoid the 4 weeks when reports come out. By not writing calls during earnings week, we benefit from price appreciation from favorable reports which should outweigh the losses from negative reports and the lost premium for that week. As a result, we must require the underlyings to have both LEAPS and Weeklys associated with them.

 

Discussion

Poor Man’s Covered Call Writing is a covered call writing-like strategy that reduces cost basis and risk. Like all strategies, there are pros and cons to using this strategy and they must be understood and mastered before moving forward with the approach. I, personally, favor traditional covered call writing but realize that it may not be practical in some portfolios so PMCC may represent a good plan B. There are several more nuances and details regarding PMCC, many more than I can include in this one article. I am in the process of writing a webinar with expanded information, more details and real-life examples which I will share in one of our Blue Hour webinars.

 

Blue Hour 2- Thursday’s webinar

The BCI team is grateful for the generous feedback we have received from our members for this event. We will be providing 6 such webinars per year, the next coming between Thanksgiving and Christmas. For those who missed it, we announced these 3 topics for future presentations:

  • Evaluating the Success of Our Mutual Funds and Financial Advisors
  • Long-term Investing for Investors Not Near Retirement
  • Poor Man’s Covered Calls- a detailed and expanded analysis of the strategy discussed in this article

Please continue to send in your ideas for future webinars.

Blue Hour webinars are free to premium members and available for purchase for general members. All presentations are archived on the premium member site.

 

Upcoming live events

October 17th, 2016

Austin, Texas

Registration link and information

 

November 5, 2016

Plainview, New York

Saturday morning 3-hour workshop at the Plainview Holiday Inn. I am the only speaker and plan an information-packed presentation covering 5 actionable ways to make money or buy a stock at a discount using both call and put options. We will also evaluate the stocks you currently own for option-selling.

 

December 6, 2016

Options Industry Council Webinar Summit

Tuesday afternoon…information to follow:

oic_logo

 

Market tone  

Global stocks were flat for the week as oil prices surged and a global concern over the health of Germany’s largest lender. Stronger 2nd quarter US growth and signs of improvement in the 3rd quarter were also positives. Volatility, as measured by the Chicago Board Options Exchange Volatility Index, rose to 13.29 from 12.3 a week ago. Oil prices rose due to expectations of an OPEC production cap, with West Texas Intermediate crude rising to $47.90 per barrel from $46.25 last week. This week’s reports and international news of importance: 

  • Economic growth in the 2nd quarter was revised higher by the US Bureau of Economic Analysis. Gross domestic product expanded by a revised 1.4%, up from an earlier 1.1% estimate
  • Early indications are that growth picked up further in the third quarter, with estimates by the US Federal Reserve banks of New York and Atlanta averaging 2.5% for the quarter, which ended Friday
  • Economic sentiment improved in the eurozone this month as the concern of the United Kingdom’s Brexit vote faded. The economic sentiment index rose to 105.9 in September from 103.5 in August
  • In Germany, the Ifo business confidence index reached 109.5, the highest level since May 2014. The index stood at 106.3 in August
  • OPEC members agreed to the need for a production cap to help reduce a surplus in the global crude oil market
  • Italy’s constitutional reform referendum will take place on December 4. The proposed reform would limit the power of Italy’s Senate and lead to greater government stability
  • US lawmakers approved a continuing resolution that will fund the government through December 9th
  • Global trade is growing slower than the world economy for the first time in 15 years, the World Trade Organization reported this week. The WTO sees trade expanding at a 1.7% rate this year, while global GDP is expected to expand by 2.2%
  • European Central Bank president Mario Draghi defended the central bank’s monetary policy in an address before the lower house of the German parliament. “Through our efforts to bring inflation back towards 2%, we have contributed to higher growth and the creation of more jobs
  • Shares of Germany’s Deutsche Bank were pressured this week by a looming legal settlement with the US government over mortgage-backed securities sales during the mid-2000s housing bubble

THE WEEK AHEAD

  • Global manufacturing purchasing managers’ indices are reported on Monday, October 3rd
  • Global service sector PMIs are reported on Wednesday, October 5th
  • The minutes of the European Central Bank’s September meeting are released on Thursday, October 6th
  • The September US employment report is released on Friday, October 7th

For the week, the S&P 500 rose by 1.19% for a year-to-date return of +5.91%.

Summary

IBD: Market in a confirmed uptrend

GMI: 3/6- Buy signal since market close of September 22, 2016

BCI: My positions for the October contracts favor in-the-money strikes 2-to-1

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The charts point to a neutral to slightly bullish outlook. In the past six months the S&P 500 rose by 5% while the VIX declined by 1%.
_____________________________________________________
Wishing you the best in investing,

Alan ([email protected])

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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.

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44 Responses to “Poor Man’s Covered Call: Practical Application”

  1. Jay October 1, 2016 12:26 pm #

    Alan,

    Thanks for this informative and clear presentation of a strategy I make use of in my IRA. As you suggest, it works best with the most boring high volume blue chips you can find like MMM, PG, XOM, T, IBM, , etc. where earnings are comparatively low key events and you write OTM every month against a lower cost basis skipping earnings with weeklies if you like.

    If readers here are comfortable with portfolio over writing holding core stocks through thick and thin I encourage you to leverage a portion of your portfolio with good ‘ol “Poor Man’s (or Woman’s) Covered calls”!

    Happy October everyone – welcome to the 4th quarter and the historically best time of year to be long the market. Let’s hope elections and the Fed do not bugger that up! – Jay

  2. Barry B October 1, 2016 11:26 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 09/30/16.

    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

    Best,

    Barry and The Blue Collar Investor Team

  3. Joel October 2, 2016 1:28 am #

    Alan,

    I’m not clear on the Unwind Now example. I’ve read the book and the Ellman Calculator examples (pretty much the same) and am still not clear.

    Buy FN at 39.36 in September and sell the October 40 call for 2.10. When the stock reaches $44.59 and the option buyback is 5.05 I made the following calculations.

    Below is an image of the Unwind Now page that I’ve filled out. It’s showing a negative time value at the bottom. Fabrinet is a stock that has risen quite quickly in the past 2-weeks — about 10%+ increase in value. So I’m not sure if using this example indicates I might unwind the position now or not. The original purchase was basically ATM. I know your example evaluates getting into a new position. So please assume that, as in your example, I could find a new position to replace the one below that would generate an equivalent ROO as in your Unwind Now example.

    Please note that I’m using simulated trading with Think or Swim Paper Money. I have not gone live yet. I’m just practicing and learning. So I’m not really risking anything and any response you send to this email is just for learning and not for use in a live trade.

    Thank you… Joel

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

    • Alan Ellman October 2, 2016 12:40 pm #

      Joel,

      At the time you made the initial trade, FN could be worth no more than $40.00 during the contract month as long as you had the option obligation. The “Unwind Now” tab of the Elite Calculator tells us that if we close both legs of the trade, our shares are worth $4459.00 and the cost to close is $505.00. This represents a net debit of $46.00 on a cost basis of $3936.00 (our original investment). This calculates to a time value loss of 1.15%. This is what it costs us to close. Now, if we can generate a higher return than 1.15% in a new position in the same contract month, it may pay to unwind. I usually like to see the time value cost-to-close closer to 0.5%. Otherwise we wait to expiration Friday and evaluate whether we should roll the option of allow assignment (if the strike is still in-the-money).

      Alan

  4. Marsha October 2, 2016 8:04 am #

    I agree with Jay. If you’re open to portfolio overwriting and restricted by cash why not use poor man covered calls.

    Thanks Alan this article explained the strategy I haven’t understood before.

    Marsha

  5. roland October 2, 2016 11:12 am #

    Alan, I found this article extremely interesting. Looking forward to blue hour in-depth discussion of this topic.
    best
    roland

  6. Roni October 2, 2016 12:53 pm #

    Thank you Alan for sharing this very interesting strategy, and explaining the road map to execute it correctly.

    I have traded debit spreads with LEAPS in the last 2 years, trying to find out on my own, and failed to find the road map and rules.
    The results were mixed at best.

    My level of trading approval allows me to trade only same month expiration, but I am certain to get the spread trading approval upon request.

    My preference today is your traditional covered call writing strategy, but I had to stay away from high priced darlings such as AMZN, GOOGL, PCLN, ISRG etc.

    I also agree with Jay’s comment, as portfolio over writing is not my objective. (Thank you Jay)
    I am in this for consistent low risk revenue, and most importantly daily activity and fun.

    Roni

    • Jay October 2, 2016 6:52 pm #

      Hey Roni,

      Thanks to you and Marsha for kind mention.

      I suspect Alan and Barry will have to add extra ports for the Blue Hour about Poor Person’s Covered Calls and Over Writing them :)?

      In the interim the Premium list is a gold mine of trending growth stocks for shorter term trades. The Blue Chip list is a great one if looking further out.

      I share your reluctance to trade nose bleed priced stocks. But options allow us to do it at lower cost/risk sticking a toe in that pool.

      In my US bias I enjoyed the Ryder Cup today. To our European friends: thanks for allowing us our turn at last :).

      A successful week to all. – Jay

      • Roni October 3, 2016 11:22 am #

        Hi Jay
        Congrats to you and all Americans on Ryder Cup success.

        I am 100% invested in October contracts, mostly picked from last weeks Premium list “bold” tickers, and some affordable darlings such as PANW, PYPL, SWKS, and TESLA, so I cannot trade this week’s list unless I can unwind my biggest loser EXP.

        I would like to know which is your preffered ticker from this week’s list ?

        Cheers – Roni

        • Jay October 3, 2016 12:56 pm #

          Roni,

          I’ll caveat this by saying I am a big chicken mostly in cash secured deep OTM puts until after the US elections!

          In 2012 from October 1 until immediately after the election the S&P fell 7%. And that was with two candidates not particularly offensive to most people! I can’t imagine the ride the next 5 weeks. Fasten your seat belt :).

          Plus we all remember 2008 around this time.

          That said America is still open for business and will continue to be. If you start with sectors Technology has been leading with chips. internet and software looking good. You have SWKS on the chips/semi side so take a look at AZPN on the software side.

          Option volume is light but you can still get $1.50 on the $40 strike OTM cash secured but for this month which is 3.75% with a $6.62 or 14% downside risk cushion before you would get put the shares if you free up some cash from EXP. – Jay

          • Roni October 3, 2016 4:30 pm
            #

            Thank you Jay,
            I did unwind EXP (7.7% loss), but I did not get a fill for the AZPN 10/21 40.00 Put $150.00 strike. Will try again tomorrow.

            You got me worried on the elections jitters. I was planning to go to cash only after the October 21 expiry Friday, but I guess it will be too late by then, so I am revising my strategy this week.

            I remember you were right last December forcasting the market crash.

            Roni

        • Jay October 3, 2016 6:30 pm #

          Roni,

          Unless your experience is different than mine chasing trades is not worth the bother. If AZPN runs away tomorrow no big deal.

          Thanks for the undeserved kind words about December. The Fed had raised rates. I was in a long line of people who expected a correction. I won no “Karnac” award for that one :).

          Please do nothing different this month based on my or anyone else’s opinion. Let price be your arbiter. Stick to your trading discipline. Listen to the market, not me.

          But since I have the floor I am glad to offer an opinion :).

          Trump will implode and the market will be fine. But he is a wounded animal. That is when most dangerous.

          Anything could happen this month. All my cash secured puts are to buy stocks at a deep discount Trump sale! – Jay

  7. Sean October 3, 2016 2:39 am #

    Please could you go over again how to deal with exit plan when the short call goes in the money with poor man CC?
    Thanks

    • Alan Ellman October 3, 2016 6:54 am #

      Sean,

      In the hypothetical example shown in this article, the $52.00 call was sold. The assumption is that we want to retain the underlying, whether it’s a LEAPS or an actual stock or ETF. If share price moves above $52.00 as expiration approaches, we would then “roll” the short call. For those new to options, this means we would buy back the $52.00 call (buy-to-close) prior to expiration and sell the next month’s $52.00 call (rolling out) or the next month’s higher strike, say $55.00 call as an example (rolling out-and-up).

      By moving expiration out into the future, our shares will not be sold.

      Alan

  8. Ira October 3, 2016 5:24 pm #

    Alan,

    Is pmcc approved for IRA accounts like covered call writing?

    Thanks for an interesting article.

    Ira

    • Alan Ellman October 4, 2016 7:35 am #

      Ira,

      Yes, there are several brokerages that will permit the use of PMCC in sheltered accounts. Check to see where your broker stands on this issue. If not, others will allow it.

      Alan

  9. Charles October 4, 2016 3:55 am #

    Alan,

    For expensive stocks, are there smaller blocks for covered calls?

    Do you use the valueline options product, free at my library?

    Thanks,

    Charles

  10. Alan Ellman October 4, 2016 7:36 am #

    Charles,

    There’s a product known as “mini options” Here’s a link to an article I published on this topic:

    https://www.thebluecollarinvestor.com/mini-options-the-impact-of-commissions-and-liquidity-on-final-returns/

    Valueline is not part of the BCI screening process.

    Alan

    • Charles October 5, 2016 6:06 am #

      Alan, that is informative for me. I am curious about the different approaches and sources of information.

      I remain curious about the different opinions in stock reports from valueline, S&P, etc…

      Thanks,

      Charles

      • Alan Ellman October 5, 2016 6:15 am #

        Charles,

        I don’t classify other screens as “differences in opinion” as much as differences in goals. I would think that most other screens are geared to long-term investing. The BCI Stock and ETF Reports are specific for short-term option-selling. I doubt you will find other screens using 20-day and 100-day exponential moving averages for example…or screening out our list of “banned stocks” due to their monthly reports. Our BCI screens are unique and specific. When it comes to the screening process for investing purposes, one size does not fit all.

        Alan

  11. Alan Ellman October 4, 2016 3:55 pm #

    The election and politics:

    It is certainly relevant how this election will impact the market. Based on the post-debate bounce that Hillary received and the market bounce, it appears that the institutional investors are favoring a Clinton win.

    As far as expressing our actual political views, here is what I tell my friends and relatives:

    There is no point in arguing politics because if we agree there is no need for a discussion. If, however, we disagree, you are not going to change my opinion and I am not going to change your misguided opinion.

    Let’s talk money…

    Alan

    • Nate October 4, 2016 10:00 pm #

      Haha! “misguided opinion”

  12. Gary October 5, 2016 7:07 am #

    Alan,

    When you buy a leap instead of a stock do you also get the dividend? I’m thinking of using this strategy until I have more cash to invest.

    Thanks.
    Gary

    • Alan Ellman October 5, 2016 10:30 am #

      Gary,

      You have identified another disadvantage of the strategy. As an option holder, we do not capture corporate dividends although ex-dividend dates are the main reason for early exercise of our short calls.

      Alan

  13. Nate October 5, 2016 2:06 pm #

    Alan, I noticed you have the Series 65 license. Does that allow you to trade others account? I was thinking of getting one of the series licenses for further education and possibly trade a little for a family member down the road.

    • Alan Ellman October 5, 2016 5:51 pm #

      Nate,

      The Series 65 is for an Investor Advisor Rep. You do not need to be working for a brokerage to earn a Series 65. It allows you to give financial advice. As you know, I don’t do that despite holding this certification. You will still need a broker-dealer to execute the trades for you.

      I trade for my mother and have a partial power of attorney to trade in her account. When options are sold each month, I call her up and tell her how much cash she can transfer to her checking account. She calls the broker and…voila.

      Good luck.

      Alan

  14. Alan Ellman October 5, 2016 5:44 pm #

    Premium members:

    This week’s 8-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.

    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

  15. Rich October 6, 2016 1:39 am #

    Alan,

    A couple of questions.

    With the market being at record levels and possibly overvalued, do you think there is a significant risk of a correction?

    I was also wondering why you do not use any credit spreads, i.e verticals, straddles, iron condors, butterflies, etc.

    Finally, since I know just enough to get myself in trouble, are there any trades shown in the membership area that I can follow until I get up to speed?

    Thanks Rich

    • Alan Ellman October 6, 2016 7:52 am #

      Rich,

      1- With this global economic and geo-political environment there will always be something that concerns investors. In my view the stock market movement will still be ultimately decided by corporate earnings which has been on the bullish side the past several years (more “beats” than “misses”). As short-term investors, we can tailor our positions to movements in the market which is something reflected in the BCI methodology. I am currently neutral to slightly bullish in my portfolio positions.

      2- I strongly believe that option trading should start with covered call writing and, once mastered, other option strategies can be tried. I have dipped my toes into other option strategies over the past 25 years but have had the most success, by far, with covered call writing and selling cash-secured puts…not even close. These strategies meet my trading style but others may ultimately find more sophisticated option strategies that are more appropriate for their trading styles.

      3- As you know, we don’t make specific trade recommendations because a certain trade for my portfolio may not be appropriate for another. I trade quite differently in my account than I do in my mother’s portfolio. However, there are literally hundreds of trades taken from my personal portfolios that are published in my books and DVD programs.

      Alan

  16. John October 6, 2016 4:02 am #

    Alan,
    Is it true in that when we roll-out or roll-out&up a stock that we should be doing it to a strike where the stock price will likely succeed in ending above it at expiry of the contract?

    If a stock is declining in the last contract week from market sentiment, then is it still a good idea to do a rolldown if the commission costs (of the BTC & STO trades) are larger than the trade credits received?

    Your exit strategies look very good and easy to apply as I still keep learning them all.
    Thanks

    • Alan Ellman October 6, 2016 8:00 am #

      John,

      When we roll out we are always rolling out to an in-the-money strike or we wouldn’t have rolled the option to begin with…we would have allowed the initial option to expire worthless and then write a call the next week based on system criteria.

      When we roll out-and-up, we use higher strikes the more bullish we are on the stock and the overall market. It is not essential that the strike end the far month in-the-money. Use the “What Now” tab of the Ellman Calculator to see initial and potential results with different far month strikes.

      Alan

  17. Alan Ellman October 6, 2016 8:28 am #

    Blue Hour 2 webinar: Attention premium members:

    The recording of last week’s webinar “Using Put options to Buy and Sell Stock” will be uploaded to your member site tomorrow. I will send email notification to all our active premium members when the video is ready to be viewed. The location of this and the previous Blue Hour webinars is on the member site (login first) and then scroll down on the left side below the discount link as shown below.

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

    Alan

  18. Mark October 7, 2016 5:01 am #

    Alan,

    I find this an interesting strategy for my limited portfolio. How do we calculate the maximum profit for the life of the LEAP option?

    Thanks a lot.

    Mark

    • Alan Ellman October 7, 2016 7:42 am #

      Mark,

      This is a tough one. The general formula is:

      Max profit = (width of 2 strikes) – net debit paid

      If BCI is trading at $74 and we buy the $40.00 LEAPS for $35.00 and sell the next month $80.00 call for $2.00 our (initial) max profit is $40.00 – $33.00 = $7.00.

      However, as we sell more short calls, the net debit decreases (increasing our profit) and if we roll up in future months, the spread increases (increasing our profits). Increases in volatility will also increase the value of the LEAPS. On the other hand, lower implied volatility and rolling down will hurt us in terms of max profit. Max profit is difficult to know up front.

      Alan

  19. Danny October 7, 2016 11:41 am #

    Alan,
    I am not a member but I have a 2 part question if you can help me by explaining. I am a very new options trader don’t know enough.

    What happens to the options 1A, I have a 1 put option of a BAC, that is equal to 100 shares. now what happens 1) if the stock splits 2:1, 2) what happens if stock reverse split 3:1.
    What will happen to my options order?

    I hope I put my thoughts in right words.

    Thanks in advance,

    Danny

    • Alan Ellman October 7, 2016 12:02 pm #

      Danny,

      The Options Clearing Corporation always adjusts option contracts fairly after a corporate event like a stock split. Buyers and sellers of calls and puts remain whole and there are neither gains nor losses for any of the above.

      Now, let’s say you hold 1 contract (call or put) at the $60.00 strike:

      1- Stock splits 2-for-1. You now hold 2 contracts with a strike of $30.00.

      2- Reverse split 1-for-3. The number of deliverable shares will change from 100 to 33.33 and the strike becomes $180.00.

      Mergers and acquisitions and special 1-time cash dividends are other corporate events that will cause contract adjustments. Each must be evaluated on its own merit…check with your broker who will probably have to research the answer.

      Alan

  20. Daniel October 7, 2016 11:41 am #

    Alan:

    When you say not to do a covered call during an earnings date, does that mean not owning the stock also? Or just don’t do the covered call?

    Thanks
    Daniel

    • Alan Ellman October 7, 2016 12:07 pm #

      Daniel,

      There are a small percentage of situations when I hold a stock through the earnings release and then write the call after the report and the price settles. We hold the stock when the company has a history of positive surprises or if we have no intention of selling that security (portfolio overwriting). For most covered call portfolios, these stocks are not in our portfolio during earnings. If the stock has Weekly options, we can use the security 48 out of the 52 weeks of a calendar year.

      Over time, selling covered calls when the earnings release is prior to contract expiration is a formula for losing money.

      Alan

  21. Jason Phillip Levy March 2, 2017 12:31 pm #

    Hi Alan,
    Ultimately, what is the worst case scenario with a PMCC? In a falling market, I assume once the short call is close in price to the long call, this is when things can get dicey. I have been trading PMCC’s for a little while now, but only see the “positive” remarks when I search Google. I have looked for LEAPS with a Delta of at least .80 so it is fairly deep in the money with a good 20%+ downside protection in most cases. As the stock price goes up in time, the LEAPS get closer to delta .90 or higher, I have thought about rolling them to the same calendar month, but with delta .80 again (this would net a credit), but this would be similar to a stock split (sort of), so the original 4 LEAPS is now 5 (one more call I can write).. or deploy the money to a new LEAP entirely. On the contrary, in a falling market, I could roll the long LEAPS down in strike price for more protection.
    I guess I am just trying to see what I am missing here, because this is 3-5 times the leverage as a traditional covered call. Portfolio management is important to me, so I just want to make sure I am not overlooking something.

    I am a premium member. Thanks for the continued support and reports. I hope this makes sense. I am trying to type this at a coffee shop with two very loud women next to me! ha ha

    Jason

    • Alan Ellman March 2, 2017 1:26 pm #

      Jason,

      As a premium member you have access to our previous webinars. In January, I presented a 1-hour webinar on this topic. See the screenshot below to locate the webinar. After viewing the presentation let me know if all your questions have been answered. EVERY strategy has pros and cons.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

      Alan

      • Jason Phillip Levy March 3, 2017 3:00 pm #

        Alan,
        I viewed the webinar and most of my questions have been answered. At the end of the day, it really comes down to your personal decision on an exit strategy. There are a lot of moving parts, unlike two-dimensional stock investing (hope it goes up or short it if you have the guts).

  22. Jason Phillip Levy March 8, 2017 8:23 am #

    Alan,
    One more question and I contacted my brokerage for their response also (haven’t heard back yet), but if you have any input on my question from experience, it would be helpful. Thanks –>

    “I was wondering if I was short a call and unable to close it out, or roll it over before expiration Friday for whatever reason (car accident, death in family, etc..), what would happen? In both of these scenarios, I own an equal amount of deep in the money LEAPS. For example, if I sold 4 AAPL calls at 139 and the stock closed on Friday at $139.50 and 4 FB calls at 135 and the stock closed Friday at 139.00. Would I wake up Monday morning and be short 400 AAPL shares and 400 FB shares? I just would like to know my worst case scenario.”

    • Alan Ellman March 9, 2017 6:51 am #

      Jason,

      Generally, brokerages will set up an “OTO” order or “one triggers other” This means that if the short call is exercised, that would result in the long call also getting exercised at the strike. This would result in a net credit.

      Please check with your broker to make sure this is how it is set up. Protocol can differ from broker-to-broker.

      Alan

  23. Jason Levy March 9, 2017 8:04 am #

    Hi Alan,
    I got an answer from my broker and they don’t exercise the long call. I am not including their entire message to me, but this is the gist of their risk management –>

    “Liquidations can occur at anytime starting 150 minutes before the end of trading on the Last Trade date for the expiring option to close a projected deficit. ”

    I am OK with this as a last protocol if I got hit by a bus.

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