# The Poor Man’s Covered Call Trade Initialization Formula

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The Poor Man’s Covered Call (PMCC) is a covered call writing-like strategy where LEAPS options are purchased instead of actual stocks or exchange-traded funds (ETFs). Weekly or monthly short calls are written against the long calls. LEAPS options have expirations between 9 and 24 months out. Typically, deep in-the-money (ITM) strikes are used because they have Delta values approaches “1”, and therefore mirror the price action of the stock itself. The strategy allows investors to enter covered call trades with less capital exposure because the LEAPS cost less than the stock itself.

BCI has developed a trade initialization formula which guides us to the most appropriate PMCC trades. The initial structuring of these trades should allow us to close at a profit, should share price rise exponentially, forcing us to close both legs of the trade.

What is the BCI trade initialization formula?

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

The BCI PMCC Calculator will display a bold red YES if the trade structuring is appropriate. A NO will appear if the trade does not comply with the formula.

Hypothetical example of an appropriate PMCC trade

• 12/20/2023: BCI trading at \$31.00
• 12/20/2023: BCI 1/17/2025 LEAPS \$15.00 has an “Ask” price of \$18.50
• 12/20/2023: BCI 1/19/2024 \$35.00 call has a “Bid” price of \$0.90

BCI PMCC Calculator

• The spreadsheet displays a bold YES, indicating that the trade aligns with our initialization formula guideline
• If both legs of the trade are closed due to substantial price acceleration, it will close at a profit of \$2.40 per-share (blue oval)
• The initial short call return, based on this 30-day trade, is 4.86%, with an additional 21.62% of upside potential
• Maximum loss (if share price moves to \$0.00) is \$17.60

Discussion

The BCI PMCC trade initialization formula provides a guideline as to the suitability of our trades. We want to ensure that, if forced to close both legs of the trade, we will close at a profit. The PMCC strategy allows us to enter our covered call trades with less capital risk, however, the strategy is so much more than “covered call writing, but cheaper”. Be sure to master all the pros & cons of this strategy and all its moving parts before deciding if it is the right strategy for you and your family. It may or may not be.

Best book for the PMCC strategy

Best online video course for PMCC

Best calculator for PMCC

Poor Man’s Covered Call Calculator

The PMCC Calculator is designed to determine initial trade structure and status as well as various position management price point considerations and the exit strategy price buyback points to buy back the short calls based on the 20%/10% guidelines detailed in the BCI books and Online Video Programs. The spreadsheet comes with a user guide.

Cells are provided to enter the option month and current date, used to assist with the calculations. There are 5 tabs incorporated into this calculator. The image above shows the 1st tab for trade initialization.

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:

Dear Alan,

Thank you for all you do.
I have felt a huge gratitude for all that you do for a while now.

I was lucky enough to end a stint at (request not to name company) with a lot of stock.   Didn’t want to sell it because it was depressed.  So, I was wondering what I can do with a concentrated stock position.

Then I learned about covered calls.  And then I told my financial planner, scared that he’d slam me for taking a stupid risk.   I mean, how could covered calls really be legit?

Turns out he was also doing them and told me about you. He’s a solid, sober, thoughtful financial planner and has been a steady guide.  Which is why, if he likes you, you must have the goods.

In the past few months I’ve had an amazing run.  And in the past couple, I’ve been using your list as the starting point to find some buy/writes.   (I’m not happy about my concentrations in tech, but I’m happy about the returns).

I think what made me write today is the delay in this week’s list and your quick and laudable fixing of the issue and sending it out in time for tomorrow’s market.

And even more than the list and your generosity in sharing your voluminous techniques and lessons, it turns out that perhaps your greatest value is just the attitude.  It’s positive, frames it in a beautiful way (‘Be your own CEO”), and has a can-do and active perspective on life and wealth.  It’s great.

So now, I think I’ve found a way to generate sufficient income to keep my life going.  (I have little kids and private school tuition…)

And in case you’re interested, I’m using the financial stability from covered calls to avoid having to take a big nasty job.  In a few weeks I’m starting in a senior role at a hospice startup here in LA.

To me, money is actually pretty worthless as a goal unto itself and the pursuit of the same has never been rewarding for me.  But freedom and meaning and the life it affords is amazing.

So, thank you for all you do.   I am immensely grateful.

Anonymous

Upcoming events

1. Mad Hedge Stock Investor Summit (online event)

June 2024

Information to follow.

2. BCI-Only Webinar (Zoom)

July 2024

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3. Investment Masters Symposium

Live, in-person presentation.

August 1, 2024

Paris Hotel, Las Vegas

Covered Call Writing & Selling Cash-Secured Puts to Generate Consistent Cash Flow

Basic & advanced principles for trading low-risk stock options with capital preservation in mind

This presentation will detail stock selection, option selection and position management, the 3-required skills to become elite covered call writers and put-sellers. It will also include ultra-conservative approaches to these strategies using Delta and implied volatility to create statistically beneficial trades. Rules and guidelines will be discussed to take the emotions out of our trades resulting in high-probability positive outcomes.

Detailed analysis will be provided regarding how to craft our trades to the current market environment, personal risk-tolerance and strategy return goals.

A multi-tiered option-selling strategy which combines both covered call writing and selling cash-secured puts will also be examined. It is known as the PCP (put-call-put) or “wheel strategy.”

Attendees will be introduced to a one-of-a-kind trade management tool, the Trade Management Calculator, which is used to enter, manage and generate final realized and unrealized trade results.

This 2-hour course is structured to benefit both beginner and advanced option traders, using real-life examples to enhance the learning process.

Details to follow.

4. Stock Traders Expo- live event in Orlando Florida

October 17 -20

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### 10 Responses to “The Poor Man’s Covered Call Trade Initialization Formula”

1. Gale April 20, 2024 11:17 am #

Alan,

When you describe the rolling out and up exit strategy for covered calls, you talk about “unrealized share appreciation”.

Can you explain what you mean by this.

Thank you.

Gale

• Alan Ellman April 21, 2024 7:14 am #

Gale,

When a call strike moves in-the-money (ITM), as a result of share price acceleration as expiration approaches, the shares can only be worth the value of the strike sold, our contract obligation to sell at that price.

When we roll out-and-up, the shares are now worth current market value or the value of the new strike, if that new strike is ITM, compared to current market value.

For example, let’s say we sold an \$80.00 strike covered call and as expiration approaches share value is \$86.00. Our shares are worth \$80.00 at that time. If we roll-out-and-up to the \$85.00 strike, our shares are now worth \$85.00, the value of the new strike.

We define this as “unrealized share appreciation” because shares are not yet sold.

Bottom line: When we roll our covered call trades out-and-up, we can do so to ITM, ATM or OTM strikes.

Alan

2. Barry B April 20, 2024 10:32 pm #

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 04/19/24.

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:

Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.

Barry and The Blue Collar Investor Team

3. Sheila April 21, 2024 4:04 am #

Alan,

When you roll up a cash secured put trade, how do we determine which higher strike to use? I usually use 2 strikes below the current stock price.

Thanks,
Sheila

• Alan Ellman April 22, 2024 6:39 am #

Sheila,

I roll-up to an OTM strike which will return a meaningful premium % credit.

If we are open to taking possession of the shares, the new strike should provide a breakeven price point at which we are willing to pay for the shares.

If we are not willing to own the shares, we would favor a deeper OTM higher strike. We must also be prepared to buy back the put option if it moves ITM as expiration approaches.

Limiting our choices to strikes 2 below current market value, will not apply in all instances.

Alan

4. Neville April 21, 2024 1:35 pm #

Alan,

What are your thoughts on writing covered calls on contra ETFs?

Or shorting stocks and writing puts?

Regards

Neville

• Alan Ellman April 22, 2024 6:42 am #

Neville,

Shorting stocks is not for me and not for most retail investors. It may be appropriate for some.

Using inverse ETFs is a wonderful strategy in confirmed bear markets.

I am not in the camp that we are in a confirmed bear market (not at all), but for those who are, inverse ETFs should be given consideration.

Our premium member ETF Reports have a section (bottom third of the report) that provides data on inverse ETFs.

Alan

5. Marcus April 22, 2024 11:15 am #

Alan,

Very nice website, well done!

I have been listening now to many of your podcasts. I have a question for you. How do you do personally with your investments? What is your win-loss ratio and annual returns since you started?

Many financial experts say that most laypeople should just invest in index funds for their lifetime because they just can’t beat the market.

Thank you.

Marcus

• Alan Ellman April 23, 2024 7:02 am #

Marcus,

The financial experts are referencing the fact that 70% – 80% of actively managed mutual funds under-perform the market (S&P 500), so low-expense ratio, broad market index funds would be the better choice. I agree with that, given those 2 choices.

Financial experts are not aware of retail investors who have mastered low-risk, option-selling strategies. Most don’t understand these strategies themselves. I frequently receive questions and inquiries from some of these experts.

Now me. For nearly 3 decades of trading covered calls and cash-secured puts, I have beaten the market every year. Some years, by a small amount, most years significantly. There is no secret sauce here. When we sell options, we are lowering our cost-basis. I never archived the ratio of winners versus losers, but I can say, with confidence, that the winners far outpaced the losers. Plus, using our exit strategy arsenal, the winners have been maximized and the losers have been mitigated.

Finally, in my 9th book, “Covered Call Writing” A Streamlined Approach”, I took a brokerage account screenshot of every trade I executed (using this strategy approach) for the entire trading year 2022, showing how I beat the market by > 15% that year.

My suggestion to you is to continue doing what you’re doing … ask questions, educate yourself and then master the strategies you are considering. The next step is to paper-trade (practice with a hypothetical account). This approach will allow you to understand the possibilities and permit you to make determinations that are in the best interest for you and your family.

Alan

6. Alan Ellman April 24, 2024 5:01 pm #

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.