What if I buy a call option instead of the stock and then sell a call option on that option? This idea has come to many of you and as a result of your inquiries, this article had to be written. Technically, these trades are known as calendar spreads so perhaps we should start off with some definitions: LEAPS — Long-Term Equity Anticipation Securities.

These are option contracts with expiration dates longer than one year. The terms calendar and horizontal spreads are interchangeable. Diagonal Spread — A long and short options position with different expirations AND strikes. If unassigned, where the price of the stock does not exceed the strike price of the short call, we then continue to write calls and generate a monthly cash flow.

Minimal time value is a characteristic of deep I-T-M LEAPS options.

All calendar spreads are constructed such that there is a profit if assigned. As noted above, this works well as long as the share price does not dramatically decline thereby reducing the returns on the short options.

Our option is good for about 22 months, so if the option ultimately expires worthless and the spread has decreased, we lose! Diagonal spreads work best for rising stocks where we can take advantage of the difference in the original strike prices.

Purchasing LEAPS and selling a call option on that position is NOT a true covered call write.

It is an alternate strategy that has its pros and cons. For most Blue Collar Investors, covered call writing is the better path to take. But to some investors who fully understand the nuances of diagonal spreads, this may be a viable alternative. Is this a misspelling of a bad joke? PIIGS is an unflattering acronym for the Eurozone countries of southern Europe known for similar economic environments, high spending, large public sector workforces and high debt:. Since these nations use the euro as their currency, they cannot use independent monetary policy to counteract the economic downturn.

Is there not a voice of reason out there? How about Citigroup officials who recently called these the GIIPS countries? For the past year this site has been bullish on the market but in times of volatility selling in-the-money strikes to garner additional protection. A 1-year, longer-term chart explains my bullish position:. However, a look at the shorter term, 3-month chart highlights the market benchmark in a trading range relatively flat and the VIX in a volatile yet ascending pattern:.

Cautiously bullish, expecting another positive earnings season and selling predominantly in-the-money strikes. Posted on July 16, by Alan Ellman in Stock Option Strategies.

To send us an email, contact us here. Subscribe to our e-mail newsletter or RSS feed to receive updates. Contact us by phone at Additionally you can also find us on any of the social networks below:. A hidden disadvantage of LEAPS is that it gives you the temptation to over-leverage yourself. The returns are so sexy, and the risk seems so manageable, that you can easily get in over your head. This is what happened to me:. How could I lose? I held onto the LEAP, and even took advantage of the really fat call premiums before the earnings report in March.

My GOOG position was essentually wiped out, and I had no means to generate any income stream. For the percentage position I had in GOOG, I could only support holding of the real shares. But, I could buy 5 LEAP contracts and essentially control shares.

If I had held the GOOG shares, I most likely would have hung in through these dark times. I had faith in the company. But, I had to get out of my LEAP position for whatever I could in order to salvage some equity and start generating some sort of meager income stream.

It was bad enough I had a percentage of my portfolio in GOOG. Although the percentage of securities with LEAPS is small the number is growing as the demand for option-related products is groing exponentially. I bought some SLB ITM about six months out in a qualified account and decided to sell diagonals. At one point I had a big gain on the options, but decided to continue to sell diagonals. SLB dropped quite a bit and I lost the gain in the options but got most of it back selling the calls.

Should have taken my profit at the time. Leverage is so very important to keep in the forefront of your mind AT ALL TIMES when dealing in options and futures.

Anyway, my original reason for coming to the comment section was simply to say this: Occasionally have some small losses…but overall positive expectancy. As for the situation in DC, my plan is either to sit on the sidelines or do DITM calls with low beta stocks…if I can find decent returns.

LEAPS and Covered Call Writing | The Blue Collar Investor

I will update and re-publish articles that are one or more years old based on the needs and requests of our members. We are so fortunate to have such a constant flow of new members as well as our base of long term and much-appreciated membership.

Increasing Profits with Covered Calls on LEAPS - Learning Markets

I receive dozens of emails each week requesting information on various topics and I will oftentimes base my decision on which topic to publish based on those emails. The BCI team makes every effort to respond to the inquiries of our membership and the feedback from our longer-term members has been all positive.

As a matter of fact I find it an attribute to my own investing to re-write and re-read an article I published more than a year ago. Based on your final comment I am pleased to see that you do as well. In my comment 7, I mis-stated what I would do in this environment, re: I meant to say would do DITM covered calls, not DITM calls.

On the subject of using DITM calls by themselves as a stock substitution strategy, I sue them frequently for stocks with very well defined uptrends. I use them with a delta of. The size of the stop depends on the particular stock and how volatile it is. However, a put would be more of a guarantee of protection to the downside. Not sure if this is an inconsistency on the premium report, but I see both dllr and dltr. Are both supposed to be on the list or just dltr?

BOTH stocks were screened. DLTR because it was 25 on the IBD 50 and DLLR because it passed our screens the previous week and is part of the BCI database of thousands of stocks. The book is at the publisher for formatting and cover production.

It should be available no later than September. As a result the share price is near a multi-year high. Despite the strong price appreciation EBAY trades at a reasonable PEG ratio of 1. Check to see if this equity deserves a spot on your watch list. If you look at page 1 of the premium report you will see that NO stocks passed ALL screens but 27 equities passed all screens except the earnings report which is due out this cycle.

Once the ER passes and the stock still meeets our system criteria, it becomes eligible and will appear in bold in our next report.

This stock has been one of my best performers in Even a 2-year chart of this stock has been impressive. This is why the BCI system requires trend and momentum identification. FOSL has been on our premium watch list for 5 months. See the chart below click on chart to enlarge and use the backarrow to return to the blog.

I sure am glad I let it get called last Friday! Have to wait a couple of days to decide if I want to get back in. I have faith in Apple. Time to close them and see how much faith I have in NFLX earnings next week. Alan 14 Thanks for the clarification on DLLR and DLTR. So wanted to be sure I was looking at the right stock. In the upcoming report there will be many more candidates as we will have a week of earnings reports behind us.

Covered call with LEAPs

Since the reports have been predominantly positive, my expectation is that many of our watch list stocks that have reported will still meet our system criteria. Also, we will still have 4 weeks of time value to capture because the current contract cycle is for 5 weeks. I getting more and more concerned about the lack of movement on raising the debt ceiling. The market seems okay with the situation so far but what will actually happen if no action is taken by August 2? Hello all, Wanted to put my two cents in since Ive been researching this strategy recently.

I think its a good strategy if applied properly. The farther out the LEAPS I purchase, the lower the IV I want at the time of purchase. I think stocks that are blue-chippers are a good place to scan for this strategy, such as MO, KO, MSFT. Just my two cents from my own personal research. Does this stock deserve a place on your watch list? Earnings surprised by The average earnings surprise of the past 4 quarters averages out to 7.

HAL trades at a forward PE of 17x compared to its industry average of 20x and a PEG of an outstanding 0. How long do you usually wait before buying a stock after the earnings report. Is the next day too soon? This is where art vs. The reason I suggest waiting is that it takes time for the analysts to comment, review, and possibly change their views…which impact the stock.

Great article as always. Good to read your stuff again! If the near call gets assigned, do you have to exercise the LEAP to buy the stock and then fulfill the assignment of the near term call?

Thanks for the reply Alan. Say you buy 5 LEAP contracts and sell 5 short term ones, and the short term 5 are assigned. So this could end up being a pretty costly strategy then, right?

Or am I missing something? I am not a big fan of this strategy mainly because of the long-term commitment but like most strategies, it can work if mastered. What you would lose on the short term call, you would gain on the LEAP minus time decay, if much on the LEAP? Yes, since we are dealing with American Style options, the positions can be closed at any time.

Since near-the-money strikes tend to have greater liquidity and tighter spreads generally, we would get more favorable pricing on the short call than the LEAPS. Short-term calls are then sold against the LEAPS. Mail will not be published Required.

You can use these tags: Notify me of followup comments via e-mail. You can also subscribe without commenting. Optionally add an image JPEG only. Site Disclosure Statement Glossary Sitemap Timeline. Members Log In About Us Glossary for Covered Call Writing Free Resources including Ellman Calculator Ask Alan Training Videos Free Training Videos Events Calendar Facebook FAQ.

The Blue Collar Investor Learn how to invest by selling stock options. Covered Calls Beginners Corner — Cash-Secured Puts The Blue Hour The Blue Hour For Premium Members. Concept behind this strategy: About Alan Ellman Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing.

Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog..

Covered Call Variation: Poor Man’s Covered Call (PMCC)

He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies. Connect With Us To send us an email, contact us here. Additionally you can also find us on any of the social networks below: Alan, Is there a list on your site for stocks that have LEAPS?

Are there a lot of choices? Thank you for all you do. This is what happened to me: In a nutshell, I got taken in with the sexy, seemingly easy money and over-leveraged myself.

Paco 6 , Absolutely. Premium Members, The Weekly Report has been uploaded the the Premium Member site. Mike 10 , In my comment 7, I mis-stated what I would do in this environment, re: Alan, Any update when your new book will be available? Looking forward to it. Patricia 12 , BOTH stocks were screened. Fran 13 , The book is at the publisher for formatting and cover production. CMG I sure am glad I let it get called last Friday! Owen, I hope you are not on the wrong side of AAPL Mark Tooker.

Patricia, In the upcoming report there will be many more candidates as we will have a week of earnings reports behind us. For your convenience, here is the link to login to the premium site: Check out this link: Paula 31 , This is where art vs. Just my opinion… Barry. Your comments make perfect sense. Alan, Great article as always. Kind of an older article, so hopefully you guys see this..

Josh, I am not a big fan of this strategy mainly because of the long-term commitment but like most strategies, it can work if mastered. The key to success is to properly structure the trade initially: Steve, Yes, since we are dealing with American Style options, the positions can be closed at any time.

Good thought on rolling the short call also. Subscribe Here - Have the latest blog articles sent to your inbox. Subscribe to this articles Comments via RSS Feed. Learn how to take a Screenshot so you can add it to your comment. Leave a Reply Click here to cancel reply. July 15, 8: Washington DC Chapter AAII- Summer Workshop.

The New Stock Market- Algorithmic and High Speed Trading January 15, Options That Expire Weekly and Conventional Expiration Cycles September 26, Short Selling: Positives and Negatives January 30, The CBOEs Volatility Index VIX September 11, Penny Pilot Program October 29, MarioG Here is my status and my experiences after Expirat Roni Thanks Barry, I was trying to enter a covered c Barry B Hi Roni, WCN had a 3 for 2 stock split on June Alan Ellman Randal, Yes.

When a strike expires in-the-money Alan Ellman Luis, When I first started with covered call wr. Recommended Investing Links DR. Eric WIsh's Wishing Wealth Blog.

Archives Archives Select Month June May April March February January December November October September August July June May April March February January December November October September August July June May April March February January December November October September August July June May April March February January December November October September August July June May April March February January December November October September August July June May April March February January December November October July June May March January December October September August June January December November September August July June May April March February January December November October September August July June May April March January December About BCI The Blue Collar Investor was NOT a brilliant idea of mine….

I was a frustrated blue collar investor just like you.