Poor Mans Covered Call Options Strategy: Make Passive Income without A lot of Money.
A lot of people have heard of the Poor Mans Covered Call (PMCC) Options Strategy and might be asking how it works and if it’s a good strategy to use when trading options.
In this article, I’m going to break it down so you can understand how the options strategy works and a good stock to try the PMCC.
The great thing about Poor Mans Covered Call is it allows you to make passive income selling options at a fraction of the cost of owning 100 shares of a company.
I’m going to assume you at least know the basics of options before we proceed. But if you don’t, no worries! You can follow my channel in the link below to learn everything you need to know about trading options.
What is a Covered Call?
First, a quick refresher because knowing what a covered call is important to know.
A covered call is an options strategy that involves holding a long position in a stock (either 100 shares or a long call option) and selling call options on that stock or position.
The strategy is designed to generate income from the premium received from selling the call option, while still providing some upside potential if the underlying asset increases in value.
If I were explaining this to a newbie, it means I own 100 stocks of a company. And I’m willing to sell it at a set price if it goes up. Because I’m willing to sell it at a set price I get paid for that.
If the stock shoots up, I may lose some of the potential gains but that’s the risk of selling a call option.
What is the Poor Mans Covered Call?
The “Poor Man’s Covered Call (PMCC)” is a variation of the covered call that can be used when you don’t have the money to buy 100 shares of a company. Instead, you buy a LEAP option below the current share price. A LEAP option is basically a call option that expires a year or more out.
That call option acts like the 100 shares and allows you to sell Covered Calls before the expiration of your LEAP option.
Now I’m going to show you a stock that would be a great stock to use for the Poor Mans Covered Call Strategy.
Example of a PMCC Strategy:
FUBO (NYSE: FUBO) is a streaming service that offers live and on-demand sports programming.
The company has been rapidly growing since it launched in 2015, and it now has over a million subscribers.
Right now you can buy a LEAP option (a call option expiring a year or more out to January 2024) for only $230. The option has a strike price of $3.5.
If you opened up 10 contracts, the cost would only be about $2,300 which is relatively low as an investment. And it would be cheaper than buying 1000 shares of FUBO at almost $4,000.
If you opened a covered call expiring two week out with a $0.50 strike above the current share price, you can collect $19 per contract.
So if the stock goes up to $4.50, you’d be forced to sell your FUBO shares. But you would collect $19 in Premium on the upside per contract every 2 weeks. That’s $190 every two weeks or $380 every month!
But keep in mind you also are selling at a profit. So you would collect $.53/share in profit or $53 per contract. That’s $530 for 10 contracts + $190 in Premium or $720 in profit for getting the shares called away in 2 weeks.
However, keep in mind you paid for the LEAP options ($2,300), so the important thing is to make sure you’ve covered the cost of your LEAP option before you get your LEAP options called away.
You can do this by selling further out in the beginning.
If you collected on average $380/month on the covered calls, you would break-even in 6 months on the Premiums and can start selling more aggressively on the 6th month as you would be able to sell your LEAP options at a profit on the upside.
I cover more on Stocks, Investing, and Options on My Channel: https://www.youtube.com/c/InvestwithDan123
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