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The Poor Man’s Covered Call: Rolling Options in the Current Contract Month + 15% Holiday Discount Expiring Soon

Exit strategies are critical to our overall success whether using traditional covered call writing or the Poor Man’s Covered Call (PMCC). In this article, we will evaluate scenarios when share price both declines and accelerates creating rolling-down and rolling-up opportunities in the current contract month. The BCI will assist with the computations.

 

What is the poor man’s covered call?

This is a covered call writing-like strategy where a deep in-the-money LEAPS option is purchased instead of a stock or ETF (exchange-traded fund). The technical term is a long call diagonal debit spread.

 

Hypothetical initial trade

  • 5/18/2020: BCI trading at $58.30
  • 5/18/2020: Buy 1 x 1/21/22 $35.00 LEAPS for $25.55
  • 5/18/20: Sell 1 x 6/19/20 $60.00 call for $1.75

 

Initial trade calculations with the BCI PMCC Calculator

 

PMCC: Initial Calculations

  • The initial trade meets our system requirement with a credit of $1.20 per share
  • This results in an initial 1-month time-value return of 6.85% with additional upside potential of 6.65% for a total 1-month potential return of 13.50%

 

Rolling calculations if share price declines to $52.00 or accelerates to $62.00 in the current contract month

PMCC: in the Current Contract Month

 

  • Rolling-down to the $54.00 (now out-of-the-money) strike results in a net option credit of 1.89%
  • Rolling-up to the $64.00 (still out-of-the-money) strike results in a net option credit of 1.05%
  • Both choices allow for additional share appreciation

 

Discussion

After entering a PMCC trade that meets our system requirements, we immediately go into position management mode. Rolling option opportunities in the current contract month may present and, if that’s the case, we must be prepared to take advantage. Using the BCI PMCC Calculator will assist with the computations.

 

For more information on the PMCC

BOOK

CALCULATOR

 

Holiday Discounts

Our holiday 15% discount expires on 12/25. Us promo code holiday15 for a 15% discount at checkout on all store items. Physical books will be shipped the day after the order Monday through Saturday… the post office has been a bit slow of late. Enter the store here.

 

Stock Charts TV interview (I go on near the 12-minute mark)

 

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,

I just wanted to say thanks again because I had another repeat week as far as profits. Another $1,000 Plus week doing cash-secured puts in a market that was down considerably for the week.

Sincerely,

Steve H.

 

Upcoming events

1.Wealth365 Summit

January 18th – 23rd, 2021

Information to follow

 

2.Long Island Stock Investors Group

February 9, 2021 at 7:30 PM ET

Zoom webinar- details to follow

 

3. AAII Research Triangle NC

April 10,2021 at 10 AM ET

Zoom webinar- details to follow

 

Alan speaking at a Money Show event

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

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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.

25 Responses to “The Poor Man’s Covered Call: Rolling Options in the Current Contract Month + 15% Holiday Discount Expiring Soon”

  1. Dave December 19, 2020 2:07 am #

    Alan, Barry,

    Happy holiday season to both of you.

    I am a new member, still in my trial period. I’ve really enjoyed your website and your approach. The primary reasons I’m very interested in your services are:

    – I love the fact that you have an exit strategy.
    – You narrow down the stock universe to something that is manageable.
    – You are extremely transparent in your approach.

    Having said that I have a few questions I was hoping you could help me with.

    – As a new member I have a 6 figure portfolio (say $100,000) in which I’m willing to invest.

    o I’ve seen your video’s on allocation, again, very helpful.
    o But my real question is on entry relative to market risk. In other words, do I invest all $100,000 next Monday on 12/21/20, or am I better served by easing in, say $25,000 per month for the next 4 months?
    o I could go all in on Monday and simply buy a protective SPY put (say at 10% less than current value) in case the entire market tanks.
    o Anyway, interested in your comment on that question.

    – On average would you say that your method of stock selection is short term or long term?

    o Given that you use IBD and other methods it would seem many of your stock selection techniques would lean toward growth. I’m not saying that growth is short term, but given IBD sell techniques it’s likely not a “buy and hold” strategy.
    o I understand that the strategy of selling covered calls is not a buy and hold strategy, by it’s very nature one is willing to let the stock get called away.
    o I’m asking more in terms of the deterioration of a stocks price. If a stocks price goes against the covered call strategy and decreases 10% – 15%, then that favors a buy/hold stock selection criteria.

    – Lastly, I know you also talk about cash secured puts. I was recently reading about another strategy called the Snider Method.

    o In the Snider Method in addition to selling a call, one also sells a cash secured put at roughly 5% below current market value.
    o It certainly adds more downside protection, but it adds the risk of having to buy another 100 shares of stock that is falling.
    o They of course suggest this lowers your average cost and might allow you to recover given the stock stabilizes.
    o Anyway, just curios if you had an opinion on that.

    Thanks in advance for your consideration.

    Dave

    • Alan Ellman December 19, 2020 6:32 am #

      Dave,

      Happy holidays.

      My responses:

      1. Start slowly and conservatively. Here’s a hypothetical example:

      Months 1 & 2: $40k with ETFs

      Months 3 & 4: $60k with a mix of stocks and ETFs

      Months 5 & 6: $80k with 5 – 7 stocks

      Months 7 and on: $100k with 7 – 10 stocks. As your portfolio grows in value, add positions that align with your comfort level such that it is manageable and time-efficient.

      2. These are short-term strategies unless we are implementing portfolio overwriting or the Poor Man’s Covered Call. We do use several IBD screens but our technical analysis is specific for short-term option-selling (exponential moving averages etc.). The combination works so well.

      We will not allow share decline of 10% – 15% without taking focused exit strategy maneuvers. This skill set must be mastered before risking even one penny of our hard-earned money.

      3. I prefer to select one strategy. Both covered call writing and selling cash-secured puts are outstanding low-risk option-selling strategies. In normal to bull market environments, I prefer covered call writing which allows the flexibility of using out-of-the-money strikes which generates 2 income-stream potential. In bear or volatile markets, using out-of-the-money puts along with covered call writing (the “PCP or Put-Call-Put) strategy makes good sense.

      Alan

  2. Mike December 19, 2020 4:03 am #

    Question Alan –

    When do you roll the option (or exit) when it appears it’s NTM now and soon will be ITM? What is the optimum timing and strategy you recommend based on your extensive experience? Is it good to wait till expiration Friday or roll it much earlier?

    Thanks,
    Mike
    Seattle

    • Alan Ellman December 19, 2020 6:38 am #

      Mike,

      Rolling options is generally reserved for on or near expiration Friday. I usually address this about 1 PM – 2PM on expiration Friday as I usually have multiple rolling opportunities each month. The cost-to-close the near-term option is lower as 4 PM ET approaches on expiration Friday while the premium on the latter month is less impacted.

      There are many other exit strategy opportunities that may arise earlier in the contract.

      Alan

      • Mike December 20, 2020 6:22 am #

        Thanks very much Alan. Will use your advice as there are times when options need to be rolled. Timing is very important.

        With warm regards,

        Mike

  3. Jonathan December 19, 2020 12:14 pm #

    Hi Alan,

    I don’t think there are ANY PMCC calculators that I was able to find on the internet. I actually started to create my own and bought yours for two reasons.. well yours was so much more detailed of course and to also check my own calculations!

    Your spreadsheet is simply at a whole new level! I have ONE question that I have been trying to wrap my head around and research but I can’t find the answer to it…

    If the game is all about capital efficiency, why would anyone own the shares to cover your short (the CC) when you can be protective and buy the LEAP?

    I have been doing CC’s for a long time and actually just started to do the PMCC and the ROC is so much greater. You are collecting the same premium, if you buy the right LEAP it’s going to act like the underlying, but your capital used is much lower. I just don’t understand why you would ever own the shares.

    Please explain this to me. I have read all the pro’s and cons of doing both and the cons of the PMCC is not that convincing to stop doing this strategy.

    Thank you for your time and your expertise. You have changed my life!!

    Best,
    Jonathan

    • Alan Ellman December 20, 2020 7:14 am #

      Jonathan,

      Thank you for your generous comments.

      Every strategy has its pros and cons and the PMCC is no exception. It is certainly much more than “covered call writing, but cheaper”

      Now, after mastering the pros and cons, if we come to a conclusion that the pros far outweigh the cons, then it is a strategy we should consider.

      The screenshot below shows the pros and cons of the PMCC taken from page 105 of our book, “Covered Call Writing Alternative Strategies”

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

      Alan

    • Sunny December 21, 2020 5:50 am #

      Hi Jonathan,

      If I may add to Alan’s response, PMCC trades are part of my portfolio and I trade them frequently. Here are some thoughts regarding your question.

      1. The first point is that PMCC trades are about leverage. And leverage works well when the markets are rising, but can incur big loses when the markets go down. I usually create 1:3 leverage when buying LEAPS. That means that if stock trades at $300 I will buy $200 strike LEAPS. Now, let’s say, we have $100K portfolio and build all positions using entirely LEAPS and the market declines by 20%. We will lose about 60% of our investment. If the market declines by 30% we will lose about 90%. As we are in 11 years of bull market the scenario when the market goes down by 20-30% and stays there for some time (few years) doesn’t look very realistic, but such thing might happen, especially in the current environment of uncertainty.

      2. The second point is that I believe PMCC trades are not suitable for all stocks. I trade PMCC only on large cap, low volatility stocks with high liquidity. This is because for growth and volatile stocks the time value of LEAPS will be huge and time decay will diminish the large part of profits we make from selling the calls. And this is very opposite from selling the traditional covered calls or cash secured puts when you can trade basically every stock in the market, maybe except the smallest ones. The spread on volatile, low liquid stocks might be very wide too, so we will lose money on this too.

      3. There are some other difficulties when trading PMCC. One of the main is navigating through ex-dividend dates. When the short call gets exercised because of ex-dividend, the shares are sold, however with LEAPS the short stock position is created and the amount of dividend is subtracted from your account. As this is leveraged position the amount of dividend can be very substantial, especially for high yield stocks. I used to trade PMCC on TLT few years ago, but gave up this idea soon, because navigating through ex-dividend dates (TLT pays dividend once per month) was too complicated.

      So overall, PMCC is a great strategy, but it’s not that easy how many traders think. It’s also much riskier than traditional covered call or cash secured put writing.

      Sunny

  4. Barry B December 19, 2020 9:13 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 12/18/20.

    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

    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

    [email protected]

  5. Rekha December 20, 2020 3:22 am #

    Hi Alan,

    Thank you for publishing all of your informative blog posts and videos. I’ve been trading covered calls on ORCL for awhile with success because the stock hardly moves week to week. It’s typically in a $57 – $61 range. However, recently ORCL has had a significant run-up post-earnings.

    My situation:
    Own 1500 shares of ORCL Long-Term
    12/15/2020: 15 x DEC 24 2020 $63.00 call sold at $0.33

    The stock shot up to $65.06 yesterday and the call option is now at $2.08.

    I have 4 trading days until expiration and I really don’t want to have the shares taken away. Do you think I should roll it now, wait closer to expiration before rolling if necessary, or just take the loss & move on? If I should roll, any guidance on whether to look for a short-term weekly or roll out a month or two?

    Thank you,
    Rekha

    • Alan Ellman December 20, 2020 5:42 pm #

      Rekha,

      When the $63.00 call was written, we are understanding that our shares cannot be worth more than $63.00 while the contract obligation is in place. If we close the short call at $2.08, our time-value cost-to-close is $0.02…almost nothing.

      Now, the question related to the next contract. Given, the desire not to have shares sold, we must avoid ex-dividend dates, the main cause of early exercise. In this case, the next ex-date is 1/6/21. If early exercise were to occur, 1/5/21 would be the most likely date. This would make the 12/31/20 contracts eligible and the 1/8/21 contracts ineligible.

      After 1/5/21 both weeklys and monthlys are eligible, avoiding the 3/11 earnings report.

      Alan

  6. Pete December 20, 2020 6:20 am #

    Alan……. Have enjoyed your 2 books. Do you use weekly options? Treat them like the last week of 4 or 5 week periods? Thanks…… Pete, Charlotte, NC

    • Alan Ellman December 21, 2020 6:24 am #

      Pete,

      I prefer Monthlys but do use Weeklys in some circumstances.

      For example, I use Weeklys to circumvent earnings reports and ex-dividend dates for some positions. Also, recently, I had been using Weekly deep OTM puts post-election to manage potential volatile market conditions.

      When using Weeklys, they are treated the same as the final week of a Monthly option.

      Alan

  7. Jerry December 20, 2020 7:37 pm #

    Alan:

    In using the “Hitting a Double” strategy, why do you wait for the stock to rebound (after buying back your option) before selling another option? Why not sell another option immediately after closing your initial position?

    Jerry

    • Alan Ellman December 21, 2020 6:30 am #

      Jerry,

      We use exit strategies to generate additional time-value premium. It may be to mitigate losses or enhance gains. “Hitting a Double” is used (usually) in the first half of as contract when share value has declined and option value has declined to the 20% threshold.

      The only way to generate additional time-value premium at that time would be to roll-down and cap share value at a lower price.

      Instead, we wait a few days, up to a week depending on where in the contract we are, in hopes of re-selling the same option. If the stock does not rebound, plan B is to roll-down or sell the stock.

      Patience can be a lucrative virtue.

      Alan

  8. Donna L December 21, 2020 1:15 am #

    Dear Alan;

    On November 24,2020 I purchased 300 shares of [email protected] $28.59 and sold 3 covered calls at December 18, 2020 29 strike for premium of .50.

    On December 18 at 12 noon XLF was trading at approx $28.52 so I decided to let it expire and then put on Jan 15 covered calls on Monday December 21.

    Lo and behold XLF shot up to 29.63 after hours and around 7pm December 18 my XLF was called away! Now I ain’t complaining because I did make a 3.1% yield (after commissions taken into account) for 24 days. But was I missing something? Should I have rolled out to Jan15 strike 29 on December 18 instead of letting it expire?

    As a general rule if it looks like a call will expire worthless do I just let it expire before entering the next month’s option? I intend on entering an XLF covered call trade again on Monday.

    Thank you.

    Donna L, premium member

    • Alan Ellman December 21, 2020 6:45 am #

      Donna,

      This is an interesting scenario. Glad you brought it up. First, congratulations on a successful trade.

      There are 2 circumstances that appear to be responsible for the exercise of the options.

      Market-makers have up to 5:30 PM ET to exercise options and report to the OCC. If a stock price moves up after hours leaving the strike ITM, exercise is possible. Here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/expiration-dates-versus-expiration-times-important-clarifications/

      Next, the most common reason for early exercise is related to ex-dividend dates. When this occurs (still rare) , it will take place the day prior to the ex-dividend date… Friday because the ex-date is today. Here is a link to the ex-date information on XLF.

      https://www.dividendinvestor.com/dividend-quote/xlf/

      Keep those winning trades coming!

      Alan

  9. David December 21, 2020 2:43 am #

    Alan,

    I watched the video on the elite-plus calculator. Once I enter my trades for say the 1/15/21 trades do I save the calculator under a different name to evaluate new trades that might come up next week?

    I just joined today and a little overwhelmed with all you offer.

    Thanks,
    David

    • Alan Ellman December 21, 2020 6:55 am #

      David,

      Welcome to our BCI Premium Member community. Take your time to learn the strategy, the system and the tools available. Practice (paper-trade) for a few months. The time and effort will be well worth it as you will then have years and decades to benefit from these great strategies.

      The Elite-Plus Calculator can be used in 2 ways if we have contracts expiring on different dates or entered at different times.

      We can save multiple copies of the calculator (REVA, REVB etc.) or simply enter different expiration dates in the column shown in the screenshot below.

      Keep in touch and let us know how you’re progressing.

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

      Alan

  10. Barry B December 21, 2020 9:48 am #

    Hi David,

    Another way to use the Elite-Plus (E+) calculator is to set up a separate folder for each trading month of the year., i.e.: January 2021 In that folder, rename the E+ calculator as Jan 2021. Save all of the details of your trading for that month. Since I do other types of trades such as Collar trades as well, I save the Collar calculator to the same folder with the same naming conventions.

    Make sure that you save the original calculators that you download in a separate calculator template file. That way you have fresh copies of the calculator(s) to use for each trading month.

    Best,

    Barry

  11. Mike December 22, 2020 2:04 am #

    Hi Alan,

    Happy holidays.

    When I set a limit order to “buy to close” my position at 20% and later 10% of premium, it is inevitable that I will make that purchase if the stock price is below my strike price. Since time value approaches zero near expiration, wouldn’t I always buy back the option in the last week? If the price is close to the strike, wouldn’t I be better off letting the option expire worthless and then write another contract? Why would I want to sacrifice 10% in the last week?

    Cheers,
    Mike

    • Alan Ellman December 22, 2020 6:12 am #

      Mike,

      Happy holidays to you too.

      The 10% guidelines in the final week of a Monthly contract is the same as using it for Weekly options. If not in place, our covered call positions should be monitored closely, rather than partially automating the process using the guideline.

      Exit strategy opportunities can arise even in the final 5 trading days of a contract. Here is a link to an article I published on this topic taken from one of my option portfolios:

      https://www.thebluecollarinvestor.com/analyzing-and-calculating-a-multi-leg-rolling-down-covered-call-trade/

      Alan

  12. Alan Ellman December 22, 2020 1:25 pm #

    Poor Man’s Covered Call Video tutorial:

    Many of you requested this. It is currently on our Youtube channel and will be posted in the store in the near future:

    https://youtu.be/s6pE8gmpnrs

    Alan

  13. Alan Ellman December 23, 2020 4:53 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 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

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Happy holidays and stay safe,

    Alan and the BCI team

    • Alan Ellman December 24, 2020 12:53 pm #

      Premium members,

      ICLN was added to the ETF report published last night. It was inadvertently omitted. Look for the report dated 12-23-2020 REVA.

      Alan

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