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How to Trade a Poor Man's Covered Call
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- Опубликовано: 12 апр 2016
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I buy the furthest leaps ITM calls and consider them as long term assets. Of course I also sell short term calls against it. Can you make a video about more detail in rolling the long call forward? For example, do I change the strike? Do I use the same delta? Do I always roll every year or every quarter when the new leaps comes out? Should I roll for debit or credit? More importantly, how do I compare and what standard should I use to make decision between different decisions in rolling leaps forward?
Brilliant and crisp analysis of adjustments in a PMCC options. Thanks for sharing
This is helpful. I made a mistake rolling down the short leg with too narrow a spread as the long leg premium was high when the stock was up. I got sloppy and paid a net of $24 for a $20 spread, which meant there was no way to profit. I'm going to close the short, which is break even and treat the long as a LEAP and hope it goes up as I think it will.
wow finally a place that explains things the way I learn. Ameritrade tutorial was too wordy and cumbersome for me. (I'm sure they're great for others)
Thank you
Thank you.
Mike ...I love the way you are explaining
amazing info, had to watch maybe about 6 or 7 times to finally have some understanding lol.
Need to watch because on a long term one a year out call the spread between the bid and ask may cost you to sell if your short term call ends up itm, also iv may contract. Id have thought protecting the leaps would be the most important thing
Thanks for a great video. Can you explain further (or share a resource) to better understand the concept at ~4:00 of not paying a debit more than the width of the strikes? Thanks
I can attempt to clarify. What I believe he is saying is essentially, don't spend more on the cost (aka the debit) of the deep in the money long call compared to the difference in strike prices between your long call and short call.
For example, today I did a poor mans covered call strategy involving AMD (currently hovering around $84.50 per share). I purchased a long call expiring in june 2022 at $65 strike price for the price of $2500 or $25 per share. I sold a short call expiring in 3 weeks at the $90 strike price (for a credit of ~100$). Notice how the difference in strike prices between my long call and short call covers my debit (cost) of purchasing my long call? The difference (or width) between $90 and $65 is $25 which is what I paid per share for my long call.
Lets say AMD shoots up to $100 in the next 3 weeks and my short call end up being in the money at its expiration. I am now obligated to sell 100 shares of AMD at $90. Therefore my long call will automatically execute to grant me 100 shares at $65 per share to COVER the short call. In this scenario, I am getting 100 shares for $65 per share and selling them for $90 per share...times 100 shares. This results in a net GAIN of $2500...which is what I paid for the long call in the first place. However, I will also have made an extra $100 from the premium I got from selling the short call in the first place. Let me know if this made sense and/or if you have any other questions.
12:00 mark is so key
Thank you for the breakdown. You mentioned that you look to close a PMCC when the "Mark" hits the 25 to 50% range. Do you consider this guideline for the entire length of the trade, of just near the expiration of the sold call?
He probably means for the entire length of the trade, because if you can hit 50% profitability a quarter of the way to expiry, thats more return per day than if you went all the way to expiry and the sold call expired worthless.
@tastytrade
Assuming the poor mans covered call is a leap, say 1-2 years. What does the investor do with the premium if the initial short call option expires worthless or is closed for a profit. Assuming one wants to hold the leap to expiration. Do they reinvest the premium into something? Like a t-bill? If you are net collecting premium over time what do you do with it?
You can sell another call against the LEAP or if you're particularly bullish on the stock you can start to purchase the underlying share to lower your cost basis further.
I guess without an underlying stock, adding a "married put" wouldn't make sense. (Can you tell whose video I watched?)
Also, in this context, "long" and "short" are somewhat confusing. I keep thinking of the *DURATION* of the option.
In this example of diagonal spread ,what can be right price close long call if price of underline goes down? Is it $67?
Hey guys! Great video, I have a question regarding the PMCC strategy: If my broker won't let me sell a naked call because of my account level, would it be better to sell a credit spread against my long call instead? & Is there pros and cons to using a credit spread to substitute the short call?
You certainly could! It's really up to you:
Pro: If you get a directional move and your call spread goes ITM, you will still see gains on your long option that you wouldn't see with a naked call hedge, as that would inhibit gains 1 for 1 past the strike. Since you have a spread that defines losses, that means your long call still has unlimited upside potential.
Con: A call spread will not reduce cost basis NEARLY as much as a naked call, but it's still something! The purchase of the further OTM call to define risk will reduce credit received from the short call drastically.
Great video!
That's awesome 👌. I'm going to have fun.
On a stock such as F at around $12, what would be the appropriate spread width? Should it be scaled down to about 4 instead of 10? Thanks.
It's really up to you! We would be more focused on the liquidity, but yes it doesn't really make sense to do a 10 point wide spread on a 12 dollar stock as we wouldn't really be changing much with defining our risk.
@7:39 by "Equally offset", does this heavily rely on your deltas of your long and short call? How do you know it is equally offset in the right proportions? What delta call do you like to buy and what delta call do you like to sell for these? Thank you!
that's my question as well. seen most people buy a 90 delta LEAP and then short the 20-30 delta. Also while PMCC is ongoing, the premium collected is invested into buying at least 10 shares of the underlying in order to get past 100 delta on the LEAP, that ensures that even if the short delta moves faster ( I have not seen the short delta move slower than the LEAP, it's part of the greeks) you still have delta 100+ which ensures profitability.
However if the stock goes down, like way down, you lose both on the stock and while adjusting. PMCC requires a lot less buying power than the wheel though, so I'm willing to take the risk
Hi this vid was really helpful - just wondering is there a rule around when to roll the Short side if it gets ITM, using the greeks or another method? Rather than just waiting to see if it becomes more ITM.....i go into a position recently where the short option has gone really far ITM and am now thinking that I should have rolled sooner, thank you
a video i watched said to make your long call's delta as close to 1.00 as possible. 0.7 delta minimum. And to keep your short call's delta 0.5 below the long call. That way, directionality mostly affects the long call, and you don't get burned too bad in those situations.
Same video also recommended the long call to be at least 6 months away from the short call. Ie, collect more premium on the shorts and maybe have a chance to expire itm at the end.
Hey Mike, thanks for the info. I was looking to diversify my strategies and execute a low IV play a few weeks ago and settled on a Synthetic CC, DIS LEAP. I know with Diagonals we are trying to pay no more than 75% of the width of our strikes. Does this rule apply similarly to a LEAP option or do we have more leeway with all that extra time to reduce our cost basis?
For example I paid a total of 36.73 For a 660 DTE LEAP Diagonal on DIS. Long call is 100 (Currently 646DTE) short call is 136 (Currently 23 DTE). Im assuming with that much time, the additional debit is acceptable. I am currently showing an 8% profit on the trade but am bullish on DIS and looking to hold for a while and reduce my cost basis. For example, I am able to roll my short call out to November and up to 140 for an additional 2.60 in credit.
Is the ideal candidate for a poor mans covered call a stock that goes steadily up? or sideways? Thanks so much. Learning a lot from you. Am I eligible to be a rising star if I trade with TOS?
i think either is fine, the strategy benefits the most when it moves up slightly, but you can do very well with flat performance. Then you put your self in the mode of selling naked calls, and the long call is just a sort of collateral for your broker.
Greetings ... on the original TastyTrade PMCC video I found an answer to the obvious question ... what happens if in the 0.001% chance my 1 SHORT call is assigned. TastyTrade responded that the 1 LEAP option covers me ... but my question is what happens if I fall off the planet, do nothing ... does the Market Maker come in on that Saturday and SELL my LEAP contract to then be able to provide the 100 shares of stock that Im obligated to pony up because of it being assigned? Thanks! THAT part has me confused ... or is it MY obligation to UNWIND the LEAPS option. Thanks!!
John,
Good question!
If you leave the planet and you have enough money to hold the short shares that the assignment would create, then nothing would happen and you would just have short shares with a long call option until the long call expired. If it expired ITM, your position would disappear. If it expired OTM, you would be left with the short shares from your original assignment.
If you leave the planet and you DON'T have enough money to hold the short shares, the brokerage would put you in a margin call, as your available cash balance would be below $0.00. They would then either buy back the shares for you, or exercise the long call to eliminate the position - they usually do what is best for you.
I hope this helps!
tastytrade so it’s sound like it may be best to buy an ITM leap, to best cover the short call (in case it drops)
Question I'm running g a poor man's covered call on DAL
When the stock was 23.93 I sold a short DAL call at $27 for May 8 and I did a $20 call buy for June 16.
The stock is going down for DAL, but my Short call is showing negative over $40 to buy it back. Why is that? I thought if it went down the yvalue of my short would go up.
Can you shoot a screenshot to support@tastytrade.com? I can look at it there.
What do you do if the stock jumps dramatically and puts your short in the money? What would happen if it expires in the money?
If it expired ITM, the short option would turn into short shares of stock. You would still have your long call, so it would offset any changes in P/L if this happened. If you didn't have the capital to hold the short shares, you would be required to close the position for an overall profit (since the short option being ITM is the best case scenario), add more capital to hold the short shares, or exercise the long call to get rid of the short shares.
Is there a diffrent option for this or do we just use a vertical with diffrent expirations?
This trade is a positive vega trade because we're buying the further dated option - it is similar to a vertical with two expirations, but much more costly and will act more like a stock replacement strategy rather than a vertical spread.
tastytrade Thank you!
Can I still do the PMCC if i have an out of the money LEAP and sell a OTM call option that has a lower strike price from the LEAP?
How do you close the options that you're selling? Is there any action required or do you let them expire every week and sell another one the following Monday?
You route the opposite order - if you buy an option to open, you sell it to close and vice versa. You don't have to hold to expiration, you can close prior to expiration if you'd like!
@@tastyliveshow Thank you. And will letting the spread expire in the money generate the most profit?
please talk about assignment
Exactly, what if it goes wrong for me. Cause someone on the other end thinks it will...
Map it out, if you get assigned short call you can exercise the long strike. Sell the point difference minus the initial debit. Now make sure it’s positive.
what platform you use please?
tastyworks.com
Is it possible to use OTM LEAPS for poor man covered call?
It's possible, but not something we like to do. This means you're paying 100% extrinsic value in the long option, and if there is a big rally quickly and both options move deep ITM, you could actually see a loss with a setup like this.
Don't you think it's more risk on buying shorter term long option? Won't be better, if I take Long option, as an ex. AAPL , 489 days expiration with 80 delta @ 35.75 and sell 30 delta monthly @ 3.00 approx. 1) If the stock remains the same for coming 1 year, I will keep selling short call month after month and have breakeven in 1 year ( 3.00 X 12 months = 36.00) still 4 months left to sell monthly option, that makes the profit of 33% in span of 1 year and 4 months. 2) If the stock goes down drastically over a period of 1 year, because I am collecting premium and some management in short call, atleast I will not be in loss or have breakeven 3) If stock goes high, then ofcourse it's profitable.
Don't you think, it's more high probability trade than going for shorter term long option diagonal? Please advise. Thanks!
For sure - the longer time we have on the long option, the more chance we have to be successful, although it will cost more up front than a shorter term option.
@@tastyliveshow how do you handle the long option if the underlying decreases over time? Is there a certain loss % at a certain DTE where you just close out the whole position? Is it never worth letting expire and exercising the long ITM?
it will still compromise my roi
Why not just buy or short stock to adjust the deltas?
Certainly could - nothing wrong with that if you're ok with the risk!
I'm having a hard time understanding this. If the price moves past my short call, they would want my 100 shares of stock. How do I fulfill that? I don't have 100 shares, I only hold an option for 100 shares at later date which is only worth a fraction of what the 100 shares are currently worth. I'm not required to make up the difference?
It is still pretty rare that your short call would be exercised prior to assignment, but if it does happen, you could exercise your long call that you own to offset the share requirement, or you could just sell the long call and buy back the shares. Both would end in the same result of no position.
Tae Ham exactly so why did Mike say there’s no adjustment for the scenario with stock going up? If we got assigned we’d then lose all the time value left on our leap which could indeed result in losing position
How to deal with risk if you have all your money up in poor mans covered calls in different stocks but we see a new 2008 with huge drops in stocks and the options may not recover in the time we have them what is it 1 year 2 years ?
That would spell bad news for the account - of course we could consider rolling the short option down closer to the long option to reduce risk, or out in time to collect more premium as well, but if we had our whole account tied up in the same bullish strategy, a 2008 move would be horrible. That is why we keep a lot of cash on the side and don't tie our whole account up, and also ensure our delta is not too strong to the upside or downside - a neutral delta portfolio could lose a lot less than a super bullish one in a move like 2008
Ok and what can one make anual if your account is 10 000 dollar ? and to take a more carefull risk ?
@@Johndoe-qn9jr 5
I don't want to lock all my money on 2 a bull call spress and the rest of my money on assignment
When trading using a leap what happens if it is called...OA
My question exactly did you figure this out?
@@jonnycaiani6428 if your short end gets called away you must Exercise you leap to cover it
@Nick Cashman is that done automatically at tastyworks, or do you need to do it yourself manually? I mean if you decide to exercise your short leg instead of rolling it? cheers
What happen if Price goes up and I do not have a money in my account to "Buy " an option to close trade? Does Trade Financial Company will sell off "Long Buy" Option?
Your long call will be increasing at a greater rate than your short call typically, so the short call going ITM would result in profit in most cases, and you could buy back the short call and sell the long call at the same time. If you did not have the capital to JUST buy back the call, the transaction would be denied.
@@tastyliveshow Thank you very much! It make sense! You have a good day.
If you are deep in the money on your short call, you will be assigned. Your broker will exercise your long call automatically and you will lose the extrinsic value of the long call. Bad news..... you sell this setup if you are challanged before it reaches 10 dte
Better with real examples.
One of the reasons why I gave this video a thumb down there no real chart.