Strategy Source

Creator: Tom King

Published Date: August 29, 2024

Video Link: https://www.youtube.com/watch?v=y4Z_L3TCIW8

Trade Setup: The “Poor Man’s Covered Call” (PMCC)

The PMCC is a diagonal debit spread that acts as a capital-efficient alternative to owning 100 shares of stock.

Action (Sell (-)/Buy (+))	Leg	DTE	Strike Price / Delta Target	Width
+ (Buy)	Long Call (LEAP)	180–365	~80 Delta	N/A
– (Sell)	Short Call	24–30	20–30 Delta	N/A

• Total Capital Required: Significantly lower than a traditional covered call. The strategy uses leverage via options rather than buying 100 shares of the underlying.
• Execution Context: The video provides a conceptual breakdown of the strategy and mentions the specific entry of an XLE (Energy Select Sector SPDR Fund) PMCC on the day of the recording.

Strategy Application

The PMCC is designed to generate income from short-term volatility while maintaining a long-term bullish bias.

• Strike Selection: The “Long” leg is typically a LEAP (Long-term Equity Anticipation Contract) purchased at roughly an 80 Delta (Strike metric / “probability of success”). This high Delta ensures the option is deep in-the-money, minimizing extrinsic value and mimicking stock ownership.
• The “Disaster Put”: To mitigate risk, the creator suggests optionally purchasing a put at approximately 20% below the current price to hedge against significant market turns.
• Buffer Zone & Theta: By selling short-term calls (24–30 DTE), the trader collects Theta (“time decay”) income. Because the long LEAP is deep in-the-money, it has very little extrinsic value and is less impacted by time decay, while the short call decays rapidly.
• Vega Management: Unlike traditional short-option strategies, this is a Long Vega (“volatility risk”) trade. Because you are buying the long LEAP call, an increase in implied volatility generally benefits the trade, as the long option increases in value.

Risk Profile

• Maximum Loss: Limited to the total cost of entering the position (the net debit paid for the spread).
• Gamma Risk: As expiration approaches for the short leg, the risk of “accelerated movement” (Gamma) increases. The creator avoids this by closing the position when there are 50–60 days remaining in the trade or if the long leg appreciates to a 50 Delta.
• Leverage: While the strategy is capital-efficient, the creator warns not to “go crazy” with leverage.

Expected Outcome

1. The “Bullish Appreciation” Zone

If the underlying stock moves higher, the long LEAP gains value. As the price moves higher, the LEAP becomes deeper in-the-money, becoming a safer, more intrinsic-value-heavy holding.

2. The “Income” Zone

The goal is for the short calls to expire worthless, allowing the trader to keep the premium.

Management & Exit Triggers

• Primary Target: If the short call reaches 80% profit, or if 50% of the profit is achieved within 50% of the time, consider closing the trade.
• The “Free LEAP” Strategy: If the long option appreciates to a 50 Delta, one may choose to sell a new covered call for the same credit as the original trade. This effectively pays for the entire long position, turning the trade into a “free” spread.
• Defensive Stop: If the long LEAP has fewer than 50–60 days to expiration, close the position to avoid excessive Gamma risk.

Would you like me to clarify how the “80 Delta” long leg functions differently than a standard stock purchase regarding leverage?