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The Poor Man’s Covered Call: How to Re-Structure a Potentially Losing Trade into a Winning One

The Poor Man’s Covered Call is a covered call writing-like strategy where a LEAPS option is used as a surrogate for the actual stock or exchange-traded fund (ETF). When structuring our PMCC trades, we must make sure it aligns with our required initial structuring formula. This will allow us to close our PMCC trades at a profit if the share price rises exponentially and we are forced to close both legs of the trade.

 

Why would we be forced to close both legs of the PMCC trade if share price moves significantly higher?

If stock or ETF price rises well above the short call strike, we would be required to pay a high intrinsic-value component to buy back the short call to avoid exercise and roll the option. We may not have the capital or the motivation to add significant resources to this trade and opt to close, preferably at a profit.

 

PMCC required trade initialization formula (Inherent in the BCI PMCC Calculator)

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

 

Factors that influence the appropriateness of our initial trade structuring

  • LEAPS have wider bid-ask spreads than near-the-money short calls and this must be overcome
  • Deeper in-the-money (ITM) LEAPS strikes have lower time-value components to the premiums than those closer to the current market value
  • The BCI PMCC Calculator will show a “YES” or a “NO” to reflect if the trade entries are appropriate for initial trade structuring
  • If “NO”, use a deeper ITM strike until a “YES” is posted

 

Real-life example with Walgreen Boots Alliance Inc. (Nasdaq: WBA: $40.01): Short call option-chain

WBA: Short Call Option-Chain

 

Real-life example with WBA: 1/17/2025 LEAPS option-chain showing $35.00 and $27.50 strikes

WBA: LEAPS Option-Chain

If we do the math, we will calculate the time-value component of the $35.00 strike to be $4.84 and that of the $27.50 strike to be $2.04, confirming that deeper ITM strikes have smaller time-value components.

 

PMCC calculations with the $35.00 LEAPS strike: “NO”

WBA: Inappropriate PMCC Initial Structuring

If forced to close this trade, it will be at a loss of $1.98 per-share (red arrow).

 

PMCC calculations with the $27.50 LEAPS strike: “YES”

PMCC: Approved WBA Trade

If forced to close this trade, it will be at a profit of $0.82 per-share (red arrow).

 

Discussion

When establishing our PMCC trades, we must adhere to the BCI initial structuring formula. Bid-ask spreads and time-value components of our premiums play major roles in these decisions. If the trade is deemed not appropriate, we look to deeper ITM LEAPS strikes with lower time-value components (also, greater intrinsic-value costs). The BCI PMCC Calculator will do all the mathematical legwork for us.

 

Poor Man’s Covered Call Resources

Online video course with downloadable workbook

Best book

PMCC Calculator

 

BCI Community live Zoom webinar May 11th: A streamlined version of covered call writing

 

New Book + 2 New Spreadsheets

Previously shared with premium members and now with the entire BCI community. For those with busy schedules who seek to generate cash flow and beat the market on a consistent basis in a user-friendly and time-efficient manner. A “don’t miss” presentation.

  • Thursday May 11th at 8 PM ET
  • Reduce the # of stocks (ETFs) considered from 8000+ to 11
  • Reduce the # of exit strategy choices from 14 to 4
  • A Zoom link will be sent to all on our mailing list and posted on this blog in a few weeks
  • Our platform allows 500 attendees
  • Login a few minutes early to ensure a seat

 

Premium Member Benefits Video

This is a great time to join our premium member community with its 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:

Hi Alan,

I’ve read your books which are excellent. I had great interest what you say about in-the-money covered calls.

Also, your website and what it offers is amazing!

Best regards,

Felipe

______________________________

Upcoming events

To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]

 

1.BCI total community webinar plus Q&A

Covered Call Writing: A Streamlined Approach (CEO Strategy introduction)

Thursday May 11,2023

8 PM ET

Zoom login link to follow for 1st 500 attendees.

 

2. Your Mid-Year Portfolio Review Virtual Expo 

June 27th – 29th, 2023

Specific time, date, topic & description and registration link 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.

14 Responses to “The Poor Man’s Covered Call: How to Re-Structure a Potentially Losing Trade into a Winning One”

  1. Barry April 22, 2023 3:11 am #

    Hello Alan.

    Please give me feedback regarding the early contract strategy:

    4/10. Bought 600 shares ELF at 83.45
    4/10 Sto 6 lots expir 5/19 strike 85 @3.70
    4/20. Btc 6 lots @11.90
    4/20 sto 6 lots expir 5/19 strike 95 @ 4.6
    4/20 Elf stock about 95.2 at the time.

    Thank you.
    Barry

    • Alan Ellman April 22, 2023 9:59 am #

      Barry,

      Congratulations on a successful trade to this point.

      I the BCI methodology, we rarely roll-up a covered call trade mid-contract. Our concern is that profit-taking on a stock that has accelerated in price substantially in a short time frame, which may convert a winning trade into a losing one. Instead, we evaluate the mid-contract unwind (MCU) exit strategy.

      Let’s review these trades:

      The initial time-value return for this 40-day trade is 4.43% with another 1.86% in upside potential. This represents a max return (w/o exit strategies) of 6.29%.

      On 4/20, the trade status was this unrealized max return of 6.29% with protection of this max return from the current market value of ELF $95.20 to the $85.00 strike. What a great position to be in!

      I admire your rationale to generate an additional income stream.

      Rolling-up in the same contract cycle will result in another 3.18% IF share price remains above the new $95.00 strike. If there is profit-taking (a definite possibility), we are at risk. I would consider this a risky approach that may work out.

      My preference would be to evaluate MCU (close both legs of the ELF trades and enter a new covered call trade with a different security, if the time-value cost-to-close approaches zero). This will lock in most of the ELF trade profit and allow for a 2nd potential income stream with a similar cash investment.

      Of the $11.90 cost-to-close, $1.70 or 2% is time-value. We ask ourselves if we can generate at least 1% more (>3%) with a new security and a new covered call trade by 5/19.

      Based on this data, my personal approach would be to take no action at this time and continue to monitor the trade as initially established but checking on MCU from time to time.

      Keep up the good work.

      Alan

      • Barry April 22, 2023 10:48 am #

        Alan

        Thanks so much for your insight. My problem is I am doing so well I am tempted to quit my day job!

        Barry

  2. Michael April 22, 2023 10:44 am #

    Alan,

    In your response to Barry, you say “This will lock in most of the ELF trade profit and allow for a 2nd potential income stream with a similar cash investment”.

    Why isn’t it the exact same cash investment?

    Thanks a lot.

    Michael

    • Alan Ellman April 23, 2023 10:38 am #

      Michael,

      When we buy-to-close the original trade, we add additional cash to the trade in the form of intrinsic-value, so the overall investment is a bit higher.

      Alan

  3. Barry B April 22, 2023 10:07 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 04/21/23.

    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.

    Please note that the Weekly Report for 04/28/23 will be uploaded on 04/27/23.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  4. John April 23, 2023 5:55 am #

    Allan,

    Last few weeks report is, well just down right profitable. Your market sentiment blurb and all the little nuances of the BLUE COLLAR REPORT save me hours

    CEO strategy ETF’s ratings were perfect, made premiums + some stock appreciation, and let some get assigned so I can start all over this week.

    Thanks .

    Sing it from rooftops in Poconos … Became a premium member.

    Big profits so far April , since your report I have increased my already great covered call income by 25% at least.

    PS

    SGOL made a great return and just missed getting assigned and I can sell outright for small profit or write some calls …

    Allan I love what you do for us. I’m a broken record , but thanks , thanks thanks……..

    John

    • Alan Ellman April 23, 2023 10:40 am #

      John,

      You made my day! Thanks so much.

      Continued success,
      Alan

  5. Victor April 23, 2023 12:08 pm #

    Dear Alan and Barry:

    I’m a BCI member and I have a question and need some guidance. Please help me out.

    I would like to invest part of my money in a very conservative income strategy using selling deep in the Money Covered Calls with ETFs. I have seen that you can a achieve a 0.8% to 1.2% return on time value with a lot of downside protection. The idea of this strategy is to hopefully never lose money, using exit strategies and managing the position if necessary.

    For example, at the moment, the MAY 19 QQQ covered call would yield a return of 1% with a downside protection of 5.8%. My question is regarding manage the position in the following scenario.

    10 days or so into the trade, the market tanks and QQQ drops around 5%. Things are looking grim and the market could keep falling. The downside protection has been greatly reduced and there is risk the trade will become unprofitable if the market keeps falling.

    What action would you recommend to roll the option and have more downside cushion and still earn a profit due to obtaining more premium due to time value. I’m confused since in this scenario, QQQ dropped so much, the originally deep ITM call I sold is now near the money and thus its time value will probably be higher than at the moment I sold it despite being 10 days into the trade. I can’t buy it back and sell a deep ITM call in the same expiration period because its time value will be much lower and thus it will create a loss. The only solution I see is to sell a deep ITM call with further expiration, so its time value premium would be greater than the now near the money call I originally sold, but this will probably reduce the return of the trade lower than the intended 1%.

    I hope you can give some guidance in this scenario and or share your experience if you have invested with a similar strategy.

    Thanks and best regards,
    Victor

    • Alan Ellman April 23, 2023 3:59 pm #

      Victor,

      This is a reasonable defensive approach to covered call writing with 1 important caveat: There is no such thing as a “never lose money” strategy that seeks to generate greater than a risk-free return.

      Our goal should be to structure our trades such that there will be many more winners than losers.

      To your hypothetical:

      1. After entering our covered call trades, always enter our 20%/10% buy-to-close, Good-until-cancelled limit orders. This will allow us to automate closing our short calls when share price declines substantially.

      2. At this point, we have several choices:

      a. Roll-down to an OTM strike which will result in a time-value credit (could also be ATM).

      b. Take no action, in hopes of re-selling the original option (hitting a double).

      c. Selling QQQ (if grossly under-performing the S&P 500 or dropping >7% from when trade was entered).

      3. We generally avoid rolling out-and-down, thereby extending an already losing trade.

      To master all exit strategies, consider this book:

      https://thebluecollarinvestor.com/minimembership/softcover-exit-strategies-for-covered-call-writing-and-selling-cash-secured-puts/

      Alan

  6. Jim April 25, 2023 11:49 am #

    I am a recent subscriber to the CEO pkg.

    My question addresses Volume & Open Interest in the decision to buy or sell ETF options per the CEO strategy. It seems that most ETF options have very low V & OI.

    My understanding is that a reasonable level for these two data should be Volume, more than 500, and Open Interest, more than 100.

    Could you refer me to an analysis for these factors as they apply to the CEO program. I have consulted Alan’s CEO CC book but cannot locate any reference.

    Jim

    • Alan Ellman April 26, 2023 7:21 am #

      Jim,

      The BCI guideline for option liquidity is 100 contracts or more of open interest (OI) and/or a bid-ask spread of $0.30 or less. Since the Select Sector SPDRs are popular ETFs, this is almost never an issue.

      Our preference is to focus in on OI rather than Volume since Vol is re-set to 0 every day, whereas OI is total # of contracts outstanding.

      The best time of the day to check option liquidity is after the market opens and market-makers have time to assess market direction. I execute my initial trades between 11 AM ET and 3 PM ET, which also avoids early morning and late afternoon computerized institutional trading.

      Alan

  7. Alan Ellman April 26, 2023 4:36 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

  8. Barry B April 28, 2023 12:46 am #

    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 04/27/23.

    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]

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