Hi Advanced Traders!
Since it looks like the markets are a little iffy on where to go, even with many companies delivering great quarterly reports, I am planning on setting up some bear call spreads and converting some of my LEAPS into a PMCC.
Bear Call Spread
Expiration Date: March 11, 2022
Step 1: Buy 1 $155 call option (delta 0.04) for $30.
Step 2: Sell 1 $134 call option (delta 0.16) for $141
Step 3: Set up a buy-stop order of 100 shares for $133 per share
Credit: $141 - $30 = $111
The goal is to have AMD stay below $133 from now until March 11. If it does, both legs will expire worthless and you will be able to keep $111.
If AMD rallies up to $134, you will buy 100 shares for $133 each, convert your bear call spread into a covered call, and sell your first leg.
Remember that I am long-term bullish on AMD, but short-term neutral to slightly bearish. If you want to set up a BCS on AMD, you want to be willing to purchase the shares to cover for your second leg.
If you have more capital or want to use margin, you can set up multiple contracts at once. Some members may set up 10 contracts at once, meaning they can collect $1,110 of credit.
In the end, feel free to tweak the numbers to your own risk-tolerance.
LEAPS to PMCC Conversion
If you already own a LEAPS option and don't mind starting a new wheel if the stock retraces up, you can consider selling a call against your LEAPS to collect some premium. The call I favor selling would be one that is 4 weeks out with a delta of around 0.16.
Here is an example of what to do:
Step 1: Own a LEAPS option
Step 2: Sell a call option with an expiration 4 weeks out with a delta of around 0.16
Step 3: Set up a buy-stop order of 100 shares to cover your sold call
If your underlying stock rallies up to your second leg strike, your LEAPS option will exponentially gain in value, and you will purchase 100 shares. You can then pair the new 100 shares to your sold call and convert it into a covered call.
Why Aren't We Buying LEAPS?
At the moment, the markets are too choppy to purchase any LEAPS. I would only purchase LEAPS when we start to see an uptrend in the markets.
If you purchase a LEAPS now, you may run into the problem of having your underlying stock not going anywhere, which will have theta decay a bit of your LEAPS option.
Stay patient at the moment. You can keep depositing money into your account, collect premiums from your dividends, covered calls, BCSs, and PMCCs, and let your cash sit as cash if you don't feel comfortable investing. Once we start to see markets move back up, we will have the ammo ready to fire.
You got this! 😀
Steve and the Call to Leap Team
The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.