Estimating Our Breakeven Price Points When Establishing Our Poor Man’s Covered Call Trades: A Real-Life Example with Apple, Inc. (Nasdaq: AAPL) – March 06, 2023
When initiating our Poor Man’s Covered Call (PMCC) trades, we can estimate our breakeven (BE) price points. It gets more complicated as more layers are added to the trades over the months and, perhaps, years that the trade continues. This article will detail the formula used to generate this BE price point and use a real-life example with AAPL.
What is the Poor Man’s Covered Call?
This is a covered call writing-like strategy where a long-term expiration option (LEAPS) is used as a surrogate replacement for a stock or exchange-traded fund (ETF). This is technically known as a long call diagonal debit spread.
The rationale for calculating our initial breakeven price point first prior to establishing our PMCC trade
We ask ourselves what the cost will be if we enter and close our trade, and this will represent our BE price point. The security will be bought at the long call’s (LEAPS) strike price, the exercised price. This is debit #1. We also must add to this the cost to enter the trade which is the premium paid for the long LEAPS position less the initial short call premium credit. The total of these 2 debits will represent our BE price point.
The actual formula[LEAPS strike + (cost of LEAPS – initial short call premium)] = BE
Real-life example with AAPL
- 5/19/2022: APPL trading at $137.35
- 5/19/2022: Buy 1 x 6/21/2024 $85.00 LEAPS at $60.97
- 5/19/2022: STO 1 x 6/22/2022 $145.00 call at $2.65
Calculating BE with the BCI PMCC Calculator
- The red arrow shows the final BE price point of $143.32
Discussion
The price at which a PMCC trade will result in no profit or loss can be estimated when the trade is first established. The data required is the strike and price of the LEAPS as well as the short call premium. The BCI PMCC Calculator will facilitate these calculations.
Author: Alan Ellman