Level Up Your Covered Calls!

In this video we are talking about the Poor Man's Covered Call (PMCC) strategy which is a variation of the Traditional Covered Call Income Strategy.

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The Poor Man's Covered Call (PMCC) is an options trading strategy designed to mimic the benefits of a traditional covered call but with less capital investment. Here's an overview of the strategy:

Definition:
A PMCC involves buying a long-term, deep in-the-money (ITM) call option (often a LEAP - Long-term Equity Anticipation Security) instead of owning the underlying stock outright. This long call acts as a substitute for the stock in a traditional covered call strategy. Then, a trader sells a shorter-term, out-of-the-money (OTM) call option against this long call.

Purpose:
Capital Efficiency: It allows traders to engage in a covered call strategy without having to buy 100 shares of the stock, which can be capital intensive, especially for expensive stocks.
Income Generation: The strategy generates income through the premiums received from selling the short-term call options.

How it Works:
Buy a LEAP Call Option: This should be ITM with a high delta (typically around 0.75 to 0.95) to closely mimic the movement of the stock. The expiration should be far out, often over six months to a year or more.
Sell a Short-Term Call Option: This option is sold with an expiration typically between 30 to 60 days and should be OTM. The premium from this option sale offsets the cost of the LEAP and represents the income part of the strategy.

Manage the Position:
Rolling: As the short call nears expiration, it can be bought back and another sold at a later date or different strike price if the stock has moved or if the trader wishes to continue the strategy.
Assignment Risk: If the short call is in-the-money at expiration, it might be assigned, requiring the trader to sell at the strike price or manage the position by either exercising the long call or rolling the short call.

Advantages:
Reduced Capital Requirement: Less money is needed upfront compared to buying 100 shares of stock.
Leverage: The leverage from options can lead to higher percentage returns on invested capital, although this also increases risk.
Income Potential: Similar to covered calls, it can generate consistent income from option premiums.

Disadvantages:
Limited Upside: The short call caps potential gains if the stock price rises significantly above the short call’s strike price.
Complexity: Managing a PMCC involves dealing with time decay, delta management, and potentially rolling options, making it more complex than simply buying a stock or a basic covered call.
No Dividends: Since you don't own the actual stock, you miss out on dividends which could be significant for some stocks.

Risks:
Time Decay: The long call option, while deep ITM, still has some time value which can decay, especially if the stock doesn't move as expected.
Volatility Risk: If volatility increases, it might increase the cost of buying back the short call or affect the value of the long call negatively if the stock moves against your position.

The PMCC strategy is particularly useful for those with a bullish to neutral outlook on a stock and who wish to generate income while limiting downside risk more than outright stock ownership would allow. However, it requires careful management due to its complexity and the potential for early assignment of the short call.

#sellingoptions #PoorMansCoveredCall #PMCC