I keep struggling with enough cash to invest. I want to invest a lot be buying equities, hold them, collect dividends, and monetize those holdings to generate even more cash. But family life, bills, kids in college, and situations like “something always happens int he worst time ever” is preventing me from investing more. So I was searching for opportunities how to boost my investing while using less cash.
And of course, one way to do it is to trade a Poor man’s covered call (PMCC), where you buy a long term Leaps and start selling covered calls against it. I like this strategy because, instead of buying 100 shares of a stock for full price, you buy a LEAPS for less than a quarter of the full price.
For example, I bought LEAPS for PPL stock. It cost me $570 per contract. If I decided to buy 100 shares of PPL, it would cost me $3,000 instead.
The picture above indicates my PMCC trade and what I have done with it since opening. A nice part is that I have collected enough premiums to lower the original cost of $527 down to $349. And I will keep doing this until the cost is zero and / or the LEAPS gain in value again to close the position and reopen a new one.
However, the problem with this is, I do not own the asset and I do not collect the dividends. And I want the dividends. The dividends are true passive income. Selling PMCC is not as you have to work for it, monitor the position, keep selling new calls against the LEAPS and eventually close the position, roll the LEAPS, sell new calls, etc. If the market closes today for several months, the dividends will keep coming, the PMCC will stop generating cash.
So I like to be trading true covered calls (CC) rather than PMCC but, during the period of low cash, I have no choice.
But this hasn’t satisfied my thirst for more leverage, safe leverage though. But what is a “safe leverage”?
Is it margin? Or any other debt to leverage your investment?
No, it is not margin or any other debt. These can actually get you into trouble and eventually ruin your investments.
And then it struck me. Why not using PMCC as a leverage? It will be a safe leverage, exposing myself to the market at a very low cost but controlling the same (larger) amount of shares as if purchased at full cost. And my new strategy has been born.
We can agree that over the long period time the stock market tends to go higher. Yes, there will be periods of time when the market will go down and struggle. It may be for a prolonged period of time (a typical bear market lasts up to 3 years, average is 1 and a half year), but generally, it will go up. and I am going to take advantage of this phenomenon and buy the entire index (here, it will be IWM, and SPY). But to buy 100 shares of IWM or SPY would require $11,691 and $27,910 cash respectively. I do not have it! So, how can I buy 100 shares of each!?
Well, that’s where PMCC comes handy. I can buy 3 years LEAPS on both indexes and it will cost me little less than $2,000 for IWM and $4,000 for SPY (talking about ATM LEAPS calls). I will be exposed to, and control 100 shares of each index for a fraction of its price. And we can safely assume that in the next 3 years the market will be higher (mainly when we recover from this covid selloff). And here is my “safe leverage”. Yes, I can lose all I paid for those LEAPS if the market doesn’t go higher in the next 3 years, but that would happen if I keep sitting on those LEAPS and do nothing. But, this will be a PMCC strategy so immediately, I will start selling covered calls against those LEAPS and lowering my cost basis.
Today, for example, IWM is trading at 116. I can buy 120 LEAPS, pay about 18.00 (or $1,800) for it. If the stock reaches $140 a share, an goes no more higher for the rest of the LEAPS life, I lose nothing. Add premiums for covered calls to it and it is a win-win trade.