PMCC seemed an ideal strategy. The LEAP uses only 1/3 or 1/4 or the capital required for purchasing the underlying stock but mimics 80% of its price movements, which essentially makes the short call/ short put "covered". However, if it seems too good to be true, it probably is. I have placed PMCC with three different underlyings. Two of the LEAPs have dropped more than half in value with only a 25% decline in the underlyings.
Lessons learned:
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Time decay is slow but always faster than you anticipate.
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IV can drop to a very low level and never go up.
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The bid-ask spread for LEAPs can be extremely wide (20% or more)
TLDR: Don't use PMCC. Use synthetic stocks (45 DTE SC + LP) instead to do covered calls/ puts
Posted by angelachan001
9 Comments
What was the underlying?
This is a vertical spread or a diagonal spread if going across months. This is not anything new.
Longer dated expiries are more exposed to IV. Leaps are the most exposed to IV.
>Two of the LEAPs have dropped more than half in value with only a 25% decline in the underlyings.
Do you understand delta OP?
If I may, I would add another lesson. PMCC is for a low IV environment. You don’t want to lose money on your long leg because of IV crush
I lost it at “with only a 25% drop in the stock”
Yeah I’m sorry these are not the right stocks to be doing a poor man’s covered call on
It’s not a trap you just need to make better choices
SPY exists for a reason
My friend … your problem was in a choice you made. That was your underlying. Why don’t you try again with an index or a blue chip
Use a stock in the DOW 30 for better performance and liquidity
It makes sense that your leaps dropped more than 50% if your underlying dropped 25%. That’s only a 2:1 leverage ratio. I’d be more selective of your underlying if the market is basically at all time highs and your picks are down 25%
“Don’t do PMCC because some bad things can happen”
Do you have better reasons other than your anecdotal experience?
Every tool of the market is useful, you have to know how and when to use them.
You didn’t. Simple as that.