How to Adjust a Poor Man’s Covered Call (PMCC) Trade to Align with the BCI Trade Initialization Formula

The PMCC is a covered call writing-like strategy where LEAPS options act as surrogates for the underlying stock or ETF. It is technically called a long call diagonal debit spread and has the advantage of lower cost to enter the trade when compared to traditional covered call writing. Short (covered) calls are sold against this long LEAPS position.

What is the BCI trade initialization formula? 

When we structure our PMCC trades, we want to be sure that if we are forced to close both legs of the trade if share price appreciates substantially, we can close at a profit. The required formula is:

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

BCI PMCC Calculator

The Initial Trade tab is designed to let us know if the proposed trade meets the formula requirements, generating a YES or a NO. If the spreadsheet shows NO, an adjustment is necessary.

Rationale behind the PMCC adjustment to generate a YES

If the spreadsheet rejects the trade, it is typically because the time-value component of the cost of the LEAPS is too large and a different, lower strike LEAPS must be selected. The deeper in-the-money the strike, the lower the time-value component of the option premium.

Real-life example with Apple Inc. (Nasdaq: AAPL): Trade rejected

AAPL PMCC Trade Rejected

The time-value component of the $120.00 long LEAPS strike is too expensive, and we must try a deeper ITM strike.

Real-life example with Apple Inc. (Nasdaq: AAPL): Trade accepted

AAPL PMCC Trade Approved

Discussion

When crafting our PMCC trades, we must consider the possibility of significant share appreciation early in the trade cycle, forcing us to close both legs of the trade. To accomplish this, we turn to the BCI trade initialization formula or the 1st tab on the BCI PMCC Calculator. When the spreadsheet rejects the trade, we must try lower ITM strikes to decrease the time-value cost of the LEAPS until we read a YES in the spreadsheet. Yes, this will cost us more cash to enter the trade, but it also protects us from a potential loss even when we are directionally correct.

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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:

Alan,

Your tools will clearly give me the opportunity to better track and update the trades as necessary.

One thing I have certainly learned from BCI is to stay the course and use and believe in the exit strategies that you have developed.  I the past I would get out of trades too early and leave a ton of money on the table.

Thanks Again,

Bruce

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Exit Strategy Choices After Exercise of Cash-Secured Puts

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A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.

July 10th -11th

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 a key requirement. This
presentation will demonstrate how the strategy can be crafted to benefit
in all market environments. Market situations highlighted are:

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

A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.

Register for free here.

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