The PMCC Strategy involves buying LEAPS call options (expirations 1 – 2 years out) and selling short-term call options against the long position. The technical term is a long call diagonal debit spread. In our BCI methodology, the trade construction must meet a required trade initialization formula where the difference between the 2 strikes + the initial short call premium must be greater than the cost of the LEAPS option. Adhering to this formula will allow us to close a PMCC trade at a profit if share price rises exponentially and we are forced to close the trade. Another calculation that can be made when setting up these trades is the breakeven (BE) price point. This article will highlight the significance of BE as calculated by the BCI PMCC Calculator.

 

Real-life example with IBM

• 6/6/2022: IBM trading at $141.35
• 6/6/2022: The January 19, 2024, $120.00 LEAPS shows an ask price of $29.15
• 6/6/2022: 7/15/2022, $150.00 call shows a bid price of $1.04

 

Calculations using the BCI PMCC Calculator

 

 

Note the following:

• The initial trade structuring successfully meets our required formula (noted with a bold “YES”) with a positive $1.89 per-share should the trade be closed early due to significant share appreciation. In other words, the trade would be closed at a profit in that scenario
• The 39-day short call return is 3.57%, 311.11% annualized
• There is additional upside potential, if IBM moves up the $150.00 strike of 29.67%
• The total 39-day potential return is 33.24%
• The breakeven price point is $148.11, higher than current market value
• What is the significance of this BE price point?

 

How we calculate the PMCC BE price point to be $148.11?

• Buy IBM at $120.00 and sell at $148.11 = +28.11
• The cost of the LEAPS is $29.15, less the $1.04 initial short call premium = $-28.11
• This does NOT mean that IBM must move to $148.11 in order to be a successful trade
• It does mean that if we close the trade, IBM must be above $148.11 (at that point in time) to be profitable

 

Practical application of the PMCC BE price point in this IBM example

If IBM trades at $148.11 at expiration, with a $150.00 strike in place, no action would be taken, and we would realize a significant 39-day return. With this share appreciation in mind, we would write a higher strike call in the next contract cycle to continue the cash generation process.

 

Discussion

When structuring our PMCC trades, the BE price point represents the share price where credits and debits equal zero should the trade be closed. The price of the underlying security can be lower than the BE price point at expiration and still result in a highly successful ongoing trade.

 

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1. Mad Hedge Traders and Investors Summit

Thursday December 8th at 12 PM ET (registration link to follow)

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Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

 Covered call writing is a low-risk option-selling strategy geared to generating cash-flow with capital preservation as a key requirement. This presentation will demonstrate how the strategy can be crafted to succeed in all market environments.

Market situations highlighted are:

• Normal-to-bull markets
• Bear and volatile markets
• Low interest rate environments

This webinar will include specific methods to set up ultra-low-risk paths to set up trades with 84%+ probability of success.

 

2. Long Island Stock Traders Meetup Group (Private webinar)

Analyzing a 1-Month Covered call Writing Portfolio from Start to Finish

Thursday February 16,2023

7:30 PM ET- 9 PM ET

A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

 What are the Select Sector SPDRs?
 How to establish a covered call writing portfolio
 What is the role of diversification?
 What is the role of cash allocation?
 Calculating initial returns
 Analyzing each trade in the monthly contract
 Final results
 Next steps

 

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