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Generating Passive Income with LEAP Options: Poor Man’s Covered Calls
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Disclaimer: I am by no means a market professional so do your own research before investing stocks! My suggestions are not guaranteed to go up in value
00:00 Introduction to Generating Monthly Income
00:39 Dream Team
01:34 Generating Passive Income with LEAP Options
01:55 Buying LEAP Options on QQQ
03:10 Earning a $24,000 Raise with LEAP Options
03:50 Selling Covered Calls with LEAP Options
04:58 Maximizing Income
05:21 Calculating Potential Income
06:04 Real-World Example
06:44 Aggressive Strategies: Maximizing Premium on NVIDIA Contracts
07:52 Recap: Poor Man Covered Calls Strategy for Monthly Income
08:31 Final Thoughts and Call to Action
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PMCCs can be a good strategy, but I see a flaw in your example. You state that you’ll make the most money if QQQ rises. Yet you’re selling short calls less than 2% above market, limiting your upside.
Also, as a general rule, you should never sell a PMCC short call with a strike BELOW the sum of your long strike and the premium paid on the long call. Doing so effectively locks in your loss if we have a big upswing in the market. You can roll all you want, but there’s only so much that can be done if the market has blown past your short strike and never looks back.
In your example, you’re committing to sell your 100 shares of QQQ at $584 when your net cost is $623. You might save a few bucks rolling, but if QQQ jumps, you’ve locked in most of a $3,900 loss.
Finally, I think an important thing for investors to keep in mind is that a PMCC is effectively taking on 75% of the upside potential and downside risk (for a 75 delta) of the nominal value of the underlying. So it may only cost you $12,450 to buy the LEAP, but you’re accepting all of the upside potential and downside risk of $42,975 worth of QQQ.
If you can stomach seeing your LEAP lose $800 in value in a day or $3,000 in a week, which are completely normal possibilities for a $43k investment in QQQ, then you may have the risk tolerance for this strategy.
The LEAP at the end of the day is just a form of leverage. If you wouldn’t buy $43k of QQQ with $12k in cash and a $31k margin loan, you probably shouldn’t consider buying a LEAP.
you did not mention that this strategy will take away your buying power, when you could use the buying power to generate a lot more incoming than your passive one