What's a buy write covered call? With options, there are a ton of different strategies. Write buy vs covered call. Naked options or spreads.
You can make money in any market. Whether up, down or sideways. However, you have to know what you're doing with options. They're not as cut and dry as you might hope. But don't let that scare you!
Ever Heard of a Buy Write Covered Call?
- Have you ever heard of a buy write covered call? Well, if you have big trade plans but limited working capital, listen up. Options are a great way to maximize leverage while minimizing risk. In this article we are going to discuss a strategy know as the Poor Mans Covered Call or PMCC for short.
Take our advanced options strategies if you're looking to learn how to buy write covered calls.
1. Buy Write vs Covered Calls
The buy write covered call position is considered a synthetic position. Why? Because you're using your opinion to buy 100 shares of stock as leverage to sell covered calls.
One benefit is that you only need a fraction of the capital required to buy 100 shares of stock in selling each traditional covered call.
2. What's the Objective?
The objective is to take advantage of time decay on the short call. However, it can take a week or more to realize any profit. This doesn't work on penny stocks. The ideal equity will have a share price of about $40 or more.
One thing you can do is buy the short call back for less than you sold it for. Then sell it again later for more than you bought it for. Remember you have time on your long call.
3. Ever Hear the Phrase "Time Is Money"?
My take on the phrase is "More Time is More Money". I like LEAPS. But I like them more when they are free. The more time you have on your long calls the more time decay you can take advantage of on your short calls.
Time decay on a LEAP is very minimal. And time decay on monthly options is brutal. In terms of the "Theta Gang" this would make you a "Theta Kingpin".
Once you have established your long position it is time to start selling premium. The typical PMCC is a simple diagonal calendar spread with the intention of closing the position when profitable.
But by now, you know that I love to reduce my cost basis by almost literally renting out my long position on a month to month basis.
Breaking Down the Buy Write Covered Call
- The buy write vs covered call method to my madness is a little complex but I'm happy to break it down for you. There are some equities where you can have a diagonal spread that's only a few months wide and a few strikes vertical. These short term PMCCs are typically low risk low reward; but pretty good probability of profit. However if it starts to move against you, it leaves little chance of exiting with a profit. This is why I would rather have a long position that is years out.
1. What's the Catch?
Example: let's say that I paid $5.00 premium for a $40 strike call. My break even price is $45 per share. To make a profit I must only sell a covered call with a strike price that has a break even price above my break even price.
After a few months without being assigned on your covered calls your break even will be significantly reduced and your profit prospects will become more lucrative.
2. Price Action
This can be a very passive strategy but I am anything but passive. You can buy and sell options over and over again if you want to take advantage of the daily price action. But be mindful that PDT rules still apply to options.
When to take profit. You can close this trade any time you want. But you'll likely want to take profit on a much longer duration once you have closed a few short calls. Here is where you want to consider a few choices.
3. Buy Write Covered Call and Start Simple
If you feel compelled to trade this strategy on a penny stock, go with GE or something that isn't going to file chapter 11 or dilute the equity.
GE won't make you a killing any time soon with the buy write covered call strategy but it might be a good back test or practice trade.
Until next time: Happy Trading. J