The Poor Man’s Covered Call (PMCC) is a covered call writing-like strategy where deep in-the-money (ITM) LEAPS options replace the long stock positions. LEAPS have expirations of greater than 1 year. Once the LEAPS is purchased, we then sell a call option, establishing our covered call-like trade. In traditional covered call writing, the short call strike is based on our initial time-value return goal range, say 1% – 3% per month (as 1 example). This article will discuss how the LEAPS strike is selected, using a real-life example with Apple, Inc. (Nasdaq: AAPL).
Time-value of ITM LEAPS strikes
As the call strike moves deeper ITM, the time-value component of the premium decreases in value. The total premium will increase due to the greater intrinsic-value component, but the time-value will decline. This is critical to understand as it relates to how we establish the appropriate LEAPS strike when establishing our PMCC trades.
PMCC trade initialization formula
When we set up our PMCC trades, we must establish that, if we are forced to close the trade due to significant share price appreciation, we close at a profit. Here is the formula that will ensure this:
[(Difference between the 2 strikes) + (initial short call premium)] > Cost of LEAPS
When this formula is successfully adhered to, our BCI PMCC Calculator will show a bold red “YES” If not, a bold red “NO”
Short call option-chain for AAPL (4/21/2023 expiration)
AAPL: Option-Chain for the 4-21-2023 Expiration
With AAPL trading at $160.20, we will look to sell the $162.50 strike at $3.60. This will generate option premium and allow for share appreciation up to the $162.50 out-of-the-money strike.
LEAPS option-chain for AAPL (1/17/2025 expiration)
AAPL: LEAPS Option-Chain for the 1-17-2025 Expiration
We will evaluate the $80.00 strike to see if the formula is met. If not, we will move deeper ITM to the $60.00 strike.
BCI PMCC Calculator using the $80.00 LEAPS strike
AAPL PMCC Trade with $80.00 LEAPS Strike
The bold “NO” means the formula has not been satisfied, with a potential closing loss of $1.65 per-share. We will now calculate with the deeper ITM $60.00 LEAPS strike.
BCI PMCC Calculator using the $60.00 LEAPS strike
AAPL PMCC Trade with the $60.00 LEAPS Option
- The bold “YES” means the formula has been satisfied, with a potential closing gain of $0.90 per-share if we are forced to close the trade early due to substantial share appreciation
- The initial 26-day time-value return is 3.42%
- The upside potential to the OTM strike is 2.19%
- The maximum 26-day return is 5.61%, 78.73% annualized (as a frame of reference)
Discussion
When establishing our PMCC trades, we must ensure that we have adhered to our trade initialization formula. If the BCI PMCC calculator shows a bold “NO”, we should calculate LEAPS strikes deeper ITM until we generate a bold “YES”
***For more information on the PMCC strategy
Best online video course with downloadable workbook
All items included in our BCI Package
Premium member benefits video
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:
Hi Alan,
Praise
I first heard you speak in Boca back in 2014. I bought your Encyclopedia of Covered Calls book, read it cover to cover, and DID NOTHING, until recently.
I bought the revised version AND bought your “Exit Strategies” book, which by the way, is AWESOME.
I sold my first covered call yesterday against CROX and am anxious to ramp up the contract volume and stock selection.
Congratulations on your progress in becoming a frequently sought after speaker at some of the most coveted investing events.
All the Best – Stacy
Upcoming events
1. Orlando Money Show Live Event
45-minute workshop: Monday October 30th 2:10 PM ET – 2:55 PM ET
Selling Cash-Secured Puts and Strategy Choices After Exercise
2-hour Master’s Class: Tuesday October 31st 9:30 AM ET – 11:30 AM ET
How to Master Covered Call Writing:
A detailed start-to-finish analysis using real-life examples.
Details & Registration information here.
2. AAII Orange County, California Chapter
Saturday November 11, 2023
Details to follow.
Hi Alan
I just wanted your UTube video labeled “Analyzing a 1-Month Covered Call Writing Portfolio from Start-To-Finish”. I have several questions:
So after the first month in your example you are holding 3 of the 4 ETFs. What do you do? Sell the 3 at a loss and re-evaluate looking for the best 4 performers or just sell the ones that do not make it to the top 4? Since I am in a loss position do I care about the cost basis or do I just accept the loss for this one month?
Thanks for all of your guidance. Your videos are very informative.
Chris
Chris,
This video relates to our CEO Strategy (Combining Exchange-Traded Funds with Stock Options) and is archived in my book, “Covered Call Writing: A Streamlined Approach” (soon to be available on the BCI website and Amazon.com). In this book, I archived every trade I made in 2022(with broker account screenshots) using this strategy approach and ended up beating the market (S&P 500) by >15%.
At the end of each monthly contract (after the 3rd Friday of the calendar month), I evaluated the 11 eligible ETFs and selected the best-performing 4 or 5 for the next monthly contract. Those that were retained from the previous month remained in my portfolio. Those that didn’t “make the cut” were sold on Monday after expiration and appropriate replacement securities were purchased.
After using the CEO Portfolio Setup Spreadsheet, there were times when I had to add to retained shares or have some sold.
For more color on this strategy approach, have a look at this video on the BCI website:
https://thebluecollarinvestor.com/minimembership/ceo-package/
Alan
Alan,
Hope all is well. Thanks for your Ask Alan #209 and all the good info you share.
One question is: For those who dont have access to your Premium Calculator and features would be: What is the best way of calculating the IV curve of those strikes in order to ferret out the best strike price for their particular situation and see the resulting Delta………….instead of starting with the delta as you mention too many do?
best,
JP
JP,
The formula inherent in the BCI Expected Price Movement Calculator is located in the screenshot below.
Premium members can find the actual spreadsheet in the premium members site, on the right side of the page (“resources/downloads”). Scroll down to “E”.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
Thanks, as always for your knowledge and willingness to help educate investors.
JP
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 08/11/23.
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
Alan or Barry, I’m watching your The Beginners Corner videos a second time (and plan to watch them more times), and covered call writing is beginning to make sense to me.
I would like to sell covered calls on the stocks I own, which are low-cost REITs. Most of them have 0 Bid and even 0 Midpoint, with Asks that range from .05 to .75 (I’ve attached a screen shot).
Is it ever possible to sell a covered call for a stock that has a 0 Bid and 0 Midpoint?
Thanks for letting me know your thoughts.
Sincerely,
Anna
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Anna,
Excellent question and observation.
With ACRE trading at $10.46, the option-chain shows poor liquidity (investor interest), and therefore, unfavorable bid-ask spreads with little opportunities for meaningful cash-flow.
That said, it is best to study option-chains during normal trading hours. I suggest reviewing the option-chain Monday morning after 11 AM ET. Market-makers wait to see market direction before setting bid-ask spreads and then we can get a better idea if there are any opportunities with securities like ACRE.
The BCI guideline for option liquidity is “At least 100 contracts of open-interest and/or a bid-ask spread of $0.30 or less”.
Once we have mastered the 3-required skills (stock selection, option selection and position management), opportunities will arise for us, if not with ACRE, then with other securities.
Keep up the good work.
Alan
Alan, thanks so much for taking the time to answer my question.
I did look at the option chain today around noon and saw exactly what you are talking about regarding volume.
I look forward to watching your videos a few more times and then taking the next step of reading your Encyclopedia.
Thanks for being a generous teacher.
Anna
Alan,
Since it appears the market is turning bearish do you have any strategies for this?
Regards,
Neville
Neville,
Yes, at BCI we have strategies and strategy approaches for all market conditions.
Before, I mention some of these, let me state that I am not necessarily on board with the conclusion that we are entering a bear market. Certainly, the market has been “bumpy” as it has reacted to earnings ups and downs and inflation data, along with rising Treasury yields. An equal amount of data is encouraging, so I am open to a good finish to the year.
Here are some strategy ideas if we are concerned about an impending bear market:
1. Collar strategy: Add a protective put to a covered call trade.
2. PCP (put-call-put or “wheel) strategy: Sell OTM puts to enter a covered call trade.
3. Sell deep OTM puts.
4. Sell deep ITM calls.
5. Use implied volatility to establish 84% probability of success ultra-low-risk trades.
6. Use low Delta strikes to establish ultra-low-risk, high probability of success trades.
As always, we avoid the risk of earnings reports and remain prepared to implement our exit strategy arsenal when those opportunities present.
Alan
Premium Members,
The Weekly Report for 08/11/23 has been revised and uploaded to the Premium Member site. Look for the report dated 08/11/23-RevA. The revision did not impact any data that you use for decision-making.
Best,
Barry and The Blue Collar Investor Team
Premium members,
A new Blue Chip Report for the best-performing Dow 30 stocks has been uploaded to your member site. These securities are eligible for the September contracts.
Look on the right side of the member page in the “resources/downloads” section and scroll down to “B”
Alan & the BCI team
Alan,
I’ve been a premium member for 6 months now and appreciate all the information you provide to us.
I do have a question about the stock and etf reports. Why are implied volatility numbers included in all your reports? Is there something we should be looking for?
Thanks a lot.
Dave
Dave,
There are multiple potential uses for IV stats.
These can serve as a measure of % option time-value returns as well as risk to the downside. The greater the IV, the better our premium returns but the riskier the trade is to the downside.
A third use of our IV stats, is to incorporate this data into the BCI Expected Price Movement Calculator (resources/downloads section of the member site) and generate a projected trading range for the specific contract period we are considering.
Alan
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