Welcome to the Poor Man’s Covered Call (PMCC) Breakeven Calculator. This tool quickly determines the breakeven point of your PMCC trade by analyzing the strike prices and premiums paid/received. It can also solve for any one missing variable, allowing you to quickly model different scenarios.
PMCC Breakeven Point Calculator
Calculated Result:
PMCC Breakeven Point Formula
$$ \text{Breakeven Point} = \text{LCS} + (\text{LCP} – \text{SCP}) $$
$$ \text{Net Debit} = \text{LCP} – \text{SCP} $$
Formula Source: Investopedia – PMCC Overview | Options Wheel – Strategy Guide
Variables Explained
The calculation relies on four key variables, where one can be derived from the other three:
- Long Call Strike ($LCS$): The strike price of the long-term, deep ITM call option you purchase.
- Long Call Premium Paid ($LCP$): The total premium paid for the long-term call, multiplied by 100 shares (e.g., a premium of $15.50 means $1,550 paid).
- Short Call Premium Received ($SCP$): The total premium received for the short-term, OTM call option you sell against your long call.
- Breakeven Point ($BEP$): The underlying stock price at the expiration of the short call at which the entire trade (including all costs) is net zero.
Related Calculators
Explore other key options trading metrics with these related tools:
- Delta Neutral Position Calculator
- Maximum Option Loss Calculator
- Options Vega Sensitivity Tool
- Stock Implied Volatility Estimator
What is PMCC (Poor Man’s Covered Call)?
The Poor Man’s Covered Call (PMCC) is a bullish options strategy that seeks to replicate the profit and risk profile of a traditional covered call, but at a significantly lower capital cost. Instead of owning 100 shares of the underlying stock (which is expensive), the trader buys a Long-Term Equity Anticipation Security (LEAPS) call option that is deep in-the-money (ITM) to act as the stock substitute.
The “covered” part of the strategy is achieved by selling a shorter-term, out-of-the-money (OTM) call option against the LEAPS. This generates premium income, which lowers the net cost of the entire position (the net debit). The goal is for the stock price to rise, allowing the trader to roll the short call for profit until the LEAPS is eventually sold.
The Breakeven Point is crucial because it tells the trader exactly where the stock needs to be for the position to be flat. If the stock expires below this point, the trade is in a net loss position. Calculating this accurately is the first step in managing the trade effectively.
How to Calculate PMCC Breakeven (Example)
- Identify LEAPS Cost: You purchase a LEAPS (Long Call) with a $100 strike ($LCS$) for a premium of $15.50 ($LCP$). The total debit is $1,550.
- Identify Short Call Income: You sell a short-term, $120 strike ($SCS$) call for a premium of $2.25 ($SCP$). The total credit is $225.
- Calculate Net Debit: Net Debit = $LCP – SCP$. In this case: $\$15.50 – \$2.25 = \$13.25$ (or $\$1,325$ per contract).
- Determine Breakeven Point: The Breakeven Point is calculated by adding the Net Debit to the Long Call Strike. $BEP = LCS + \text{Net Debit}$. $\$100.00 + \$13.25 = \$113.25$.
- Interpret Result: The Breakeven Point is $113.25. If the stock is trading above $113.25$ at the short option’s expiration, the trade is profitable.
Frequently Asked Questions (FAQ)
The maximum loss is limited to the Net Debit paid to enter the trade. For example, if you pay $1,325 net for the position, that is your maximum risk. This is a key advantage over a traditional covered call, which has a higher potential loss if the stock goes to zero.
Why is the Long Call Strike always ITM for a PMCC?The long call is typically deep ITM (often with a Delta of 0.70 or higher) to mimic the movement of 100 shares of the underlying stock. A high Delta means the option price moves nearly one-for-one with the stock price, making it an effective stock substitute.
How does commission affect the breakeven calculation?While commissions are small, they slightly increase the Long Call Premium Paid ($LCP$) and slightly decrease the Short Call Premium Received ($SCP$). For a precise calculation, these transaction costs should be included in the respective premium inputs.
What happens if the short call gets exercised (assigned)?If the stock is above the Short Call Strike ($SCS$) at expiration, you will be assigned. You will be obligated to deliver shares at the $SCS$. You would then exercise your Long Call to obtain the shares at the $LCS$, effectively netting the difference and realizing the maximum profit for that cycle.