Rolling-Out Poor Man’s Covered Call Trades: A Real-Life Example with Alphabet Inc. (Nasdaq: GOOG) – January 23, 2023
When the Poor Man’s Covered Call (PMCC) strategy is employed, the short call is the active leg of the trade. If a strike is expiring in-the-money (ITM), we can roll the short call to a later expiration date. This article will detail 2 possible rolling trades with GOOG, 1 for rolling-out to the same strike and the other to rolling-out-and-up to a higher strike. The BCI PMCC Calculator will be used to accomplish the calculations. Note that the BCI member who shared these trades with me was considering rolling well before contract expiration.
What is the PMCC?
This is a covered call writing-like strategy where a LEAPS option (expirations > 9 months away) is purchased instead of the actual stock or ETF. Short calls are then written against the long LEAPS position. The technical term is a long call diagonal debit spread and is considered a long-term strategy.
Real-life trade with GOOG
- 7/22/2022: GOOG trading at $110.80
- 7/22/2022: The 9/15/2023 $60.00 call LEAPS had an ask price of $52.60
- 7/22/2022: The 8/19/2022 $115.00 call had a bid price of $2.35
- 7/30/2022: GOOG trading at $116.60
- 7/30/2022: The ask price of the 8/19/2022 $115.00 call was $1.84
- 7/30/2022: The bid price of the 9/16/2022 $115.00 call was $3.57
- 7/30/2022: The bid price of the 9/16/2022 $120.00 call was $2.65
Initial trade structuring using the BCI PMCC Calculator (Initial Trade Tab)
- The purple circled areas show a net credit of $4.75 per-share if significant share appreciation forced closure of both legs of the trade, with “yes” meaning that the trade passes our calculation requirements
- The red arrows show an initial premium return of 4.47%, 156.73% annualized based on a 29-day trade
- The blue arrow shows an additional upside potential of 7.98% should share value move from $110.80 up to or beyond the $115.00 strike
Rolling calculations with the BCI PMCC Calculator (Rolling Next Month Tab)
- The initial time-value return for rolling-out is 3.44% based on the net option credit (intrinsic-value deducted by the spreadsheet)
- The initial time-value return for rolling-out-and-up is 4.80% based on the net option credit+ unrealized share value by increasing the strike ceiling (increases the difference between the LEAPS and short call strikes)
Discussion
The active management leg of PMCC trades is the short call. The long LEAPS will require less frequent adjustments. Rolling exit strategies are common and available for both rolling-out and rolling-out-and-up. The former is a more defensive approach and the latter a more aggressive approach. We base our ultimate position management decisions on personal risk-tolerance, overall market assessment and initial time-value return goal ranges.
Author: Alan Ellman