Poor Man Covered Call Trade Selection and Set up

External question — Personal Finance Stack Exchange Author: ML33M Original post: https://money.stackexchange.com/questions/160977 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I did some learning on the PMCC strategy and thinking to implement it on SPY. As the reading materials urged I have been trying to make sure the initial set up long ITM LEAP at around 0.8 delta, and selling monthly OTM calls. By looking at the numbers on paper, I realised it is hard to have a set up where in case a huge rally and my shot calls got assigned and I can come up net positive. So I'm stuck not knowing how should I select the long and short legs? or SPY isnt the right choice to begin with. For example, SPY currently trading at $474.14 (red day yesterday), the 2025/Jan/17 LEAP strike at $370 has a delta of 0.93, ask price is $122.86. If I purchase this, then the monthly call I can sell, for example, 2024/Feb/23 strike $490, has a bid price of $2.1. In this set up, if SPY goes beyond $490 tmr, I have to close the position = $490-$370-$122.86+$2.1 ~ -$0.76, so I set out to be $76 in the red. Moving the short call higher than $490 will diminish the premium received by a lot, while moving the LEAP strike less than $370 doesnt help too much as it inflates the debit I need to pay. How should I properly set this up? or I should buy the LEAP on a red day, wait for a green day to sell the monthly call?

External answer — Personal Finance Stack Exchange Author: Hart CO Original post: https://money.stackexchange.com/a/160978 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. You're not considering what the higher SPY price would do to the value of your long call (delta). There are plenty of good videos/websites that explain the greeks, I like the wording that Merrill Edge uses for Delta: Delta is the theoretical estimate of how much an option's value may change given a $1 move up or down in the underlying security. That's why a deep ITM long call is used for the poor-man's covered call (I typically see ~70-80 delta suggested). Your long call will, in theory, increase in value by 0.93 if SPY increases by $1. The higher SPY goes the deeper ITM your long call goes, which means even higher delta. I'd suggest reading a bit more about the downsides of strategies that involve LEAPS, and finding some additional resources to learn more about the poor man's covered call and options in general before diving in.

External answer — Personal Finance Stack Exchange Author: Bob Baerker Original post: https://money.stackexchange.com/a/161023 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. In order for this spread to be risk free, it's cost must not exceed the difference in strikes which in your case is -$76. You can shift it to positive by buying a call LEAP one strike higher ($375) or selling a $490 call whose expiration is one week later. In reality, if you are assigned on the short called (above $490), your LEAP will have appreciated. In addition, if SPY approaches $490, you might consider rolling that short strike up and out for breakeven or a credit, increasing the profit potential (credit plus wider striker width). You have to be careful if you are dealing with a broker like Robinhood because they'll arbitrarily exercise ITM options before 4 PM on expiration day. If you don't have the funds or margin to cover the assignment, they'll exercise the long leg and poof, your profit is gone. It's imperative to have some good modeling software when trading complex option positions.

External answer — Personal Finance Stack Exchange Author: Watt Original post: https://money.stackexchange.com/a/168032 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I ran into the same problem when I started with PMCCs - the math gets confusing fast, especially figuring out if you'll come out ahead in an early assignment scenario.The key formula you need is:(Strike width) + (Short call premium) > LEAP costIn your SPY example: ($490 - $370) + $2.10 = $122.10, which is less than your $122.86 LEAP cost. So you're right - this setup locks in a small loss if assigned immediately.A few things that helped me: Go slightly less deep ITM on the LEAP - A 0.93 delta is very safe but expensive. Try 0.80-0.85 delta strikes - they cost less while still tracking the stock well. Look at extrinsic value, not just delta - You want minimal extrinsic value on the LEAP (that's money that decays). The short call strike matters - Your $490 strike only gives $2.10 premium. Moving closer to ATM gives more premium but less upside room. It's a tradeoff. I've been using this free PMCC analyzer that runs these calculations automatically and shows whether a setup passes the "early assignment" test: https://www.optincome.ai/tools/pmcc-analyzer Might save you some spreadsheet time.