beginners corner

The Poor Man’s Covered Call (PMCC): Explaining Upside Potential + Premium Membership News

When using the PMCC strategy, a covered call writing-like strategy, our goal is to generate cash flow with a lower cash investment than traditional covered call writing. The BCI PMCC Calculator shows initial time-value returns from this short call premium as well as the upside potential should share price accelerate. This article will analyze this potential benefit from the PMCC strategy.

 

What is the PMCC strategy?

This is a covered call-like strategy where a LEAPS option is purchased instead of the corresponding stock or ETF. Typically, the LEAPS is deep in-the-money expiring 1 to 2 years out. Deep ITM LEAPS will have Deltas approaching “1” and, therefore, mirror the price movement of the underlying security.

 

Real-life example with Intel Corp. (Nasdaq: INTC)

  • 5/18/2020: INTC trading at $58.30
  • 5/18/20: The 1/21/2022 $35.00 LEAPS has an ask price of $25.55
  • 5/18/2020: The $60.00 1-month out-of-the-money short call has a bid price of $1.75

Next, we enter this information into the blue cells of the BCI PMCC Calculator.

 

Data entry: INTC PMCC trade

 

Entering Option-Chain Data into the PMCC Calculator

 

Calculations: INTC PMCC trade

 

INTC: PMCC Initial Trade Calculations

 

Key takeaways

  • The initial 32-day time-value return from the short call premium is 6.85%
  • The upside potential from current market value of $58.30 to the $60.00 strike is 6.65%

 

Upside potential as it relates to the PMCC strategy

Upside potential is exactly as presented… potential. It is not realized until the trade is closed. If our LEAPS is closed, we benefit from share appreciation, keeping in mind that our deep ITM LEAPS have Deltas approaching “1” and price movement will be similar to that of the underlying. A rise in price of $1.70 in INTC, will translate to a similar benefit in LEAPS price. If the short call is not exercised or rolled out-and-up, we benefit from an increase in the strike spread. As an example of the latter, if we sell a higher short call strike the next month (after share appreciation near or to $60.00), such as a $62.50 short call the spread will increase from $25.00 ($60.00 – $35.00) to $27.50 ($62.50 – $35.00).

 

Discussion

In the PMCC strategy we benefit from upside potential in 2 ways. First, share appreciation will enhance the value of our long LEAPS position. Second, if the option is not exercised or rolled-out-and-up, we will create a scenario to sell at a higher short call strike, thereby benefitting from a larger strike spread.

***My thanks to Eben for suggesting this topic.

 

For more information on the PMCC strategy

Best book

Best online video course with downloadable workbook

Best calculator

 

No price increase for premium members

On November 1, 2021, BCI will be raising membership rates for new members only. This will not apply to current members. It’s been 4 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and ETF reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.

This price increase will not apply to current active members as you are grandfathered into the current rate for life or as long as your membership remains active. This is our way of showing our appreciation to our long-term members.

The increase for new members will go into effect on November 1, 2021 as follows:

Monthly: $19.95 for the first (trial) month and $57.95 each 30-days thereafter (currently $49.95).

Annual: $657.40 for the first 13 months (includes a reduced first month and a free last month) and then $695.40 every 13 months thereafter (includes 1 free month). Currently $569.40 and $599.40.

All new members who subscribe between now and 10/31/2021 will be grandfathered into the current rate and will see no price increase on 11/1/2021.

Thanks to all our loyal members for your support over the past 14 years and for putting on the financial map.

Premium membership information

 

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:

 

Upcoming events

1.Mad Hedge Traders and Investors Summit: Free webinar

September 15, 2021

11 AM ET – 12 PM ET

Covered Call Writing Blue-Chip Stocks to Create a Free Portfolio of Large Tech Companies

Register for free here

 

2. Wealth365 Summit: Free webinar

October 11th – 16th

Stock Options: How to Use Implied Volatility to Determine Strike Selection

Information and registration link to follow

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

****************************************************************************************************************

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.

38 Responses to “The Poor Man’s Covered Call (PMCC): Explaining Upside Potential + Premium Membership News”

  1. Alen September 11, 2021 2:23 am #

    Hi Alan,

    Hope all is well and you are enjoying your week. I have a question on covered calls. Selling in the money puts is a synthetic way of doing covered calls. Since the sweet spot of selling the call is .22 or .23 delta, is it safe to say that I can use the same strike to sell the in the money put instead of doing the covered call.

    For instance if .22 delta is 160 on AAPL will selling 160 in the money put mimic the covered call’s sweet spot idea?

    Sincerely,
    Alen

    • Alan Ellman September 11, 2021 7:19 am #

      Alen,

      Lots to unpack here.

      The 2 strategies are similar but not precisely the same. We must master the pros & cons before deciding on which is the best strategy for our families.

      Both are outstanding cash-generating investment approaches. We may even decide to use both as a multi-tiered option-selling strategy. We call it the PCP (put-call-put) strategy in our BCI methodology.

      The $160.00 strike for AAPL is out-of-the-money for calls and ITM for puts so the Deltas are quite different. The deeper OTM we go, the lower the Delta (approaches zero). The deeper ITM we go, Delta approaches “1” (-1, in the case of puts since there is an inverse relationship between option premium and share price for puts).

      In the screenshot below, the 22 Delta $160.00 call strike for AAPL has a Delta of 22 but that same put strike has Delta of -0.77. We must define our trading goals prior to strike selection. Cash generation only? Buying a stock at a discount? Both?

      The frequent question I get is which Delta should I use when selecting options. My answer is that there is no one Delta that is appropriate for every situation for every investor. First, decide on the “moneyness” of the option. OTM is a more aggressive for calls and OTM but closer to ATM is more aggressive for puts. ITM is more defensive for calls and deeper OTM is more defensive for puts. ITM puts can be used for buying a stock at a discount quickly.

      Next, we must define our initial time-value return goal range based on our personal risk-tolerance. This will differ from investor-to-investor. My goals are quite different in my portfolios compared to the one I trade for my mother.

      Once we have determined a strike based on these factors, we have a strike which certainly has a Delta associated with it but our conclusion is based on our overall market assessment, chart technicals and personal risk-tolerance, not on Delta. One size does not fit all.

      Let’s not restrict our investment flexibility by locking ourselves into 1 specific Delta.

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

      Alan

      • Roni September 12, 2021 11:30 am #

        Alan and Alen,

        AAPL? is this choice of ticker a coincidence?
        AAPL took a big hit due to the EPIC ruling and closed at 148.97.

        I understand that you picked AAPL as an example, but this company has a huge valuation, 2.5 trillion, which is not our typical ticker for trading CCs or PUTs. Another detail is the upcoming event on 09/14 with the launch of the new iPhone.

        I am baffled – Roni

        • Alan Ellman September 12, 2021 6:29 pm #

          Roni,

          You make a good point that there is no single stock that is appropriate for every investor at every point in time. AAPL has appeared on our watch lists periodically over the years based on the BCI screening process and is one of the most successful companies in the history of the stock exchanges. Still, right for everybody? No.

          All the information that we, as retail investors, can access is baked into the current price. The institutional investors have this information as well. Is it a good choice today? That can be debated with both sides making valid points.

          In this specific example, I was responding to Alen’s AAPL inquiry.

          Alan

  2. Barry B September 12, 2021 12:49 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 09/10/21.

    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:

    http://www.youtube.com/user/BlueCollarInvestor

    On the front page of the Weekly Stock Report, we now display the Top Performing 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.

    Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.

    Best,

    Barry and The Blue Collar Investor Team

  3. Art September 12, 2021 2:56 am #

    Hello Alan,

    I have been a premium BCI member for about 9 months and am very pleased. I recently completed a trade but I am a little confused about the “actual” profit or loss. I’m hoping you can clarify. My concern is counting as profit the difference between “Bought up Value” and the cost to BTC, and then counting the profit again if RVLV is called on 9/17/21.

    Here are the details of the trade:

    1. 8/24/21 purchased 500 shares RVLV @ 57.06
    STO 5 Calls, Strike 58, @ $2.16 expiring 9/10/21
    2. 8/27/21 purchased 200 shares RVLV @ 57.02
    STO 2 Calls, Strike 59 @ $1.45 expiring 9/10/21
    3. 9/10/21 RVLV stock price is 62.38
    BTC 7 Calls @ average price of $4.20
    Total cost to BTC = $2940
    Bought up Value = $3745
    4. 9/10/21
    STO 7 Calls, Strike 63 @ $1.74 expiring 9/17/21

    Thank you for reviewing this trade. Your expertise has been invaluable.

    Sincerely,
    Art

    • Alan Ellman September 12, 2021 11:56 am #

      To all,

      Earlier today, I posted the calculations for Art’s trades and entered a different strike than that in the email. I will recalculate shortly.

      Alan

      • Alan Ellman September 12, 2021 12:49 pm #

        Art,

        Here we go:

        The screenshot shows the benefit of rolling-out-and-up given our assumption of exercise at the $63.00 strike… nice work.

        The best way to analyze final trade results when implementing a series of trades and exit strategies is to evaluate both sides of the trade. here is your good news:

        Final trade calculations if RVLV is sold at the new $63.00 strike:

        •Stock side: [($63.00 – $5705) x 700] = $4165.00
        •Option side: [($1080.00) + ($290.00) – ($2940.00) + $1218.00)] = -$352.00
        •Total net profit: [($4165.00) – ($352.00)] = $3813.00
        •24-day % return: $3813.00/$39,934.00 = 9.5%
        •Annualized % return: [(9.5%/24) x 365] = 145%

        Keep up the good work.

        Alan

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

        • Art September 12, 2021 6:19 pm #

          Alan,

          Thank you for reviewing my trade and clarifying everything. I think I was counting option side profit incorrectly. I really appreciate all that you do. It is great being part of the BCI community.

          Thanks so much,
          Art

  4. Guerry September 12, 2021 11:59 am #

    Hi Alan,

    Thanks for the PMCC article today. Can you use this strategy when you have level 2 options trading or does it require level 3 options trading?

    Thanks,
    Guerry

    • Alan Ellman September 13, 2021 7:48 am #

      Guerry,

      It could be. Levels of trading approval will vary from broker-to broker. Typically, if the levels run from “0” to “3” the PMCC would be level 2. I suggest you call a rep from your brokerage and ask the question.

      Alan

  5. Roni September 12, 2021 12:02 pm #

    Alan,

    reviewing the Stock Screen I see that a few of your 10% BTC limit orders were reached. The same happened to me, so my question is: What now?
    The alternatives I see, are:
    1 – Wait for a rebound.
    2 – Sell the losers.
    3 – Sell 10/15 CCs on the ones that do not have ERs prior to expiry.

    What else can we do?

    Roni

    • Alan Ellman September 13, 2021 7:53 am #

      Roni,

      My plan to to see the market direction on Monday and re-sell same-expiration options on Monday or Tuesday. If may involve rolling-down to OTM strikes or “hitting doubles” if there is a significant rebound.

      Alan

      • Roni September 13, 2021 9:28 am #

        Thank you, Alan,

        I will do that.

        I am sorry to bother you with so many questions.

        I have a hard time mastering the 4th skill, which is keeping my cool.

        Roni

  6. Scott September 13, 2021 2:36 am #

    Hi Allan,

    I’ve been watching your You Tube Beginner’s corner video series for almost a year now over and over again. I have recently become a premium member. I think the education you give to newbie investors like myself is fantastic so thank you.

    I am chasing some guidance and hopefully you can point me in the right direction. I am using Interactive Brokers TWS platform. I have executed my trades but I am struggling to execute the Exit strategies I have learned from you. For instance, I purchased a stock (INMD) for $124.20 and sold the $125 strike for $4.90. The stock is now trading at around $137. I would like to stop my shares from being assigned but I can’t figure out how to do that on the platform.

    I have searched the tutorial videos on their website but can’t find the information.

    Thanks in advance and keep up the great work. I’m pretty sure you have changed many lives.

    Many thanks and kind regards from Australia.
    Scott

    • Alan Ellman September 13, 2021 9:06 am #

      Scott,

      Thank you for your generous comments.

      To avoid exercise, we must buy back the option. Because the share price is so much higher than the strike sold, that will be costly but a majority of that cost will be negated by the increase in share value from our contract obligation to sell at $125.00 to current market value. That is known as intrinsic-value. The actual cost-to-close is the remaining time-value aspect of the premium.

      For more clarity on these concepts, see the information we provide on the “mid-contract unwind” exit strategy. Here is a link to one of the articles I’ve published on this topic:

      https://www.thebluecollarinvestor.com/closing-a-covered-call-writing-position-mid-contract-a-real-life-example/

      For more detailed information:

      The Complete Encyclopedia for Covered Call Writing- classic edition (I): Pages 266 – 273

      The Complete Encyclopedia for Covered Call Writing-Volume 2: Pages 243 – 252

      Alan

  7. Jonathan September 13, 2021 4:11 am #

    Alan,

    I am relatively new to the BCI and paper trading as recommended.

    As we are entering the last week of this options cycle expiring 9/17/21, do you cancel your 10% BTC orders now? OTM short calls not already BTC will reach that threshold sometime this week including before expiration Friday. I think you do not recommend selling positions to “find another soldier” with so few days left until expiration in this cycle.

    Thanks for your guidance! I have enjoyed your books and bought them as gifts for others who are similarly interested. I appreciate your help.

    Cordially,

    Jonathan

    • Alan Ellman September 13, 2021 1:20 pm #

      Jonathan,

      I prefer to leave the 10% BTC limit order in place even in the last week of a monthly contract unless we can constantly monitor our positions. I do not like leaving these positions “unattended”

      If and when the short calls are closed, we can either roll-down or sell the underlying security.

      Alan

  8. Guru September 13, 2021 10:11 am #

    Alan,

    On your 9/10 weekly report, it says ” BCI: …. None of my 10-Delta were exercised”. Does this refer to weekly or monthly Delta =0.1 OTM cash secured puts that you sold? I know you have talked about and done this as a very conservative positioning during uncertainty? Thank you in advance!

    Guru

    • Alan Ellman September 13, 2021 4:19 pm #

      Guru,

      I dedicate one of my smaller portfolios to selling weekly deep OTM cash-secured puts with Deltas < 10. I have been using this ultra low-risk strategy for over 1 year to generate annualized returns averaging 8% - 10%. Very few have been exercised and, so far, all were sold at significant profit after exercise. So far, so good with this strategy. Alan

      • Guru September 14, 2021 12:23 pm #

        I have been doing this too.. since you wrote about it a while ago when if the market appears frothy to my chicken little instincts!

        Alternatively, I set the strikes around lower bollinger band and go 2 weeks and so if it gets assigned, I’m still buying at the relative lows.. not too many assignments.

        Thanks for your clarifications and your messages back!

  9. Jim September 13, 2021 10:51 am #

    Alan,

    I am a new member and have one basic question. I know you recommend selling the contract at the same time you buy the stock. If I am planning on having 10-12 monthly stocks/contracts, would you recommend buying all of them on one day or spread it out over a few days? For example, on September 20, would it be recommended to buy 12 stocks and sell the contracts that day for the October 15th expiration or perhaps buy/sell 3 or 4 that day and look to do 3 or 4 more the next day, etc.? Hope that makes sense.

    Thanks,

    Jim

    • Alan Ellman September 14, 2021 7:01 am #

      Jim,

      Since short-term movement of the market cannot be predicted with precision and the fact that we have Theta (time-value erosion of our premiums) working against the “waiting” position, I enter all my trades for the new contract month on the Monday or Tuesday after expiration Friday, generally Monday between the hours of 11 AM ET and 3 PM ET to avoid early and late volatility resulting from institutional computerized trading. Make sure all BTC limit orders are in place after entering the trades.

      Alan

  10. Bill September 13, 2021 6:48 pm #

    Hi Alan,

    I read your latest article, “The Poor Man’s Covered Call” and found it quite informative. I do not understand one of the entries in the second BCI calculator screen shot. The second line says the initial trade price is $1.20. I do not understand where that came from.

    Later in the table it says that the initial maximum profit is $1.20. Since the short call price for the $60 call is $1.75, I would think that would be the initial trade price and initial maximum profit. Please explain.

    Thanks,
    Bill

    • Alan Ellman September 14, 2021 7:14 am #

      Bill,

      The first tab of the BCI PMCC Calculator relates to the initial structuring of the trade and the required formula that needs to be adhered to when setting up these trades.

      The formula states that the differences between the 2 strikes + the initial short call premium must be greater than the cost of the LEAPS option. This way, if we are forced to close both legs of the trade due to significant share appreciation, the result will be a profit. In this case, that profit is $1.20 per-share.

      Here’s the formula for INTC in this article:

      [($60.00 – $35.00) + $1.75] – ($25.55) = +$1.20

      If we are forced to close the trade(short-term) as a result of substantial share appreciation, the max return is $1.20 per-share.

      Alan

  11. Alan Ellman September 14, 2021 9:04 am #

    Premium members:

    The Blue Chip Report for the top-performing Dow 30 stocks for the October 2021 contracts has been uploaded to your member site.

    Look in to “resources/downloads” section (right side) and scroll down to “B”

    Alan & the BCI team

  12. Dennis September 14, 2021 12:22 pm #

    Hello Alan,

    Thanks for your replies.

    Btw may I know if 10/20% rule applies for CSP?

    If yes, how should I set it up?

    Thanks

    Regards
    Dennis

  13. Alan Ellman September 14, 2021 5:12 pm #

    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 performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    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

  14. Denise September 15, 2021 2:35 pm #

    Hi Alan!!!

    I’m looking at my options for the INMD simulated 125 call that will close this Friday. I believe that the best thing to do is nothing and keep the premium.

    But just so I better understand the exit strategies, if I wanted to buy it back at this point I would pay 10% of the premium right?

    So if the premium was $13.20 I should pay $1.32 to close. Is this right? And if it is right would that really execute? The reason I ask is that when I try to buy it back it gives me a price of $6.80…

    Thank you sooo much for all your help!!

    Denise

  15. Alan Ellman September 16, 2021 6:24 am #

    Denise,

    The 20%/10% guidelines are in place when share price of the stock declines significantly. This is not the case with INMD which has moved up in price.

    The cost-to-close the $125.00 call is dictated by the market, not us. As of pre-market this morning (Thursday), INMD is trading at $133.74. The $125.00 call is $8.74 in-the-money (lower than current market value). This means that the value of that $125.00 is $8.74 + a small time-value component (since there are only 2 days to expiration. The cost-to-close currently shows $9.40 (“ask” price) on the cboe.com site. This will change somewhat when the market opens this morning.

    Use the “What Now” tab of the BCI Calculators to determine if rolling the option to the next contract month makes sense.

    Either way, you’ve executed a very successful trade.

    Alan

  16. Todd September 16, 2021 6:26 am #

    Hi Alan,

    I purchased HZO Marine Max a couple of months ago when you had it on your list… I have had two contracts on it which I received the premium and they weren’t exercised each time.

    This months is due to expire 17th and won’t be exercised ( I would suspect given current value). Now next month they are due to report financials and I know you recommend not to sell a contract in those months.

    Do your Premium clients then just hold those stocks for the month and start again a month later? Or do they sell the stocks now and move on?

    I am going to break about even (inc 2 Premiums) if I sold now as the stock has decreased.

    Or would holding not be out of the question and sell Contract again in a month?

    I understand you can’t give advice, I just like to know what other people do so I can make a more educated decision.

    On a separate note: I’ve got 11 contracts going now (HZO was my first) and am really enjoying this and the learning and I’m making a good profit so I will be getting a lot more contracts going shortly.

    Regards,
    Todd

    • Alan Ellman September 16, 2021 6:44 am #

      Todd,

      Glad to learn of your recent success.

      Two comments:

      1. HZO is scheduled to report earnings on 10/21, after the 10/15 October contract expirations… so it is eligible from that perspective.

      2. Let’s say that it reported prior to 10/15… do we sell or hold? A majority of the time we sell and use an eligible security to continue the cash-generation process. Exceptions can be made when we have a lot of confidence in the underlying and one that has a history of favorable earnings reports. Since the latter is difficult to predict, selling is generally the course most BCI members take.

      Bottom line: This is not a decision you are now faced with. If the current option expires worthless, evaluate this stock over the weekend to see if it deserves to be in your portfolio for the October contracts.

      Alan

    • Roni September 17, 2021 2:27 pm #

      Todd,

      I am in the same position as you are.

      I have had 4 contracts since July 21st and after buying them back twice at 10%, I am holding the shares at break-even.

      I should have sold them this morning at the open. 🙁

      Roni

  17. Fernando September 17, 2021 10:27 am #

    Hello good afternoon, mr. Ellman, as a member of Blue Collar Investor, wanted to ask you that if, having sold 5 puts of SD strike price 7.5 and expiring today, September 17, 2021. You would not have the right to buy the 500 shares at the price of 7, 5?
    Thanks in advance and best regards.
    Fernando

    • Alan Ellman September 17, 2021 12:32 pm #

      Fernando,

      When we sell a cash-secured put, exercise is controlled by the option buyer, not us.

      In this case, the put holder can sell their shares to us at $7.50 by 4 PM ET today. With SD trading at $11.61 as I type, that not happening.

      The put(s) will expire worthless at 4 PM ET and the cash used to secure those puts will be available on Monday.

      Congrats on a successful trade.

      Alan

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