Calculate the Pearson Product-Moment Correlation Coefficient (PMCC) to measure the strength and direction of the linear relationship between two variables.
Data Input
| X Values | Y Values | Actions |
|---|
Results
PMCC Result
0.00
No correlation
Neutral
Sample Size (n)
0
Sum of Products
0
Interpretation
The PMCC value indicates the strength and direction of the linear relationship between your variables.
Enter your data and click “Calculate PMCC” to see results
Data Visualization
Scatter Plot
Correlation Strength
About PMCC
The Pearson Product-Moment Correlation Coefficient (PMCC) is a measure of the linear correlation between two variables X and Y. It has a value between +1 and -1, where:
- +1 indicates a perfect positive linear relationship
- -1 indicates a perfect negative linear relationship
- 0 indicates no linear relationship
The PMCC is widely used in the sciences as a measure of the strength of linear dependence between two variables. It was developed by Karl Pearson from a related idea introduced by Francis Galton in the 1880s.
Mastering the Poor Man’s Covered Call (PMCC) Options Strategy
The Poor Man’s Covered Call (PMCC) is an advanced options trading strategy that offers traders a cost-effective alternative to traditional covered calls. By utilizing long-term LEAPS options instead of owning the underlying stock outright, traders can achieve similar profit potential with significantly less capital outlay.
This comprehensive guide will explore the PMCC strategy in-depth, including its mechanics, risk management principles, and practical implementation using Google Sheets for tracking and analysis. Whether you’re an intermediate options trader looking to expand your strategy toolkit or an experienced investor seeking more capital-efficient approaches, this guide will provide valuable insights.
Understanding the Poor Man’s Covered Call
The PMCC, also known as a “Diagonal Debit Spread,” is a defined-risk strategy that involves purchasing a long-term call option (typically with at least one year until expiration) and simultaneously selling shorter-term call options against it. This approach mimics the profit profile of a traditional covered call but requires substantially less capital.
Key Components of a PMCC Position
Long LEAPS Call
- Typically purchased with 1-2 years until expiration
- Deep in-the-money (delta of 0.80 or higher)
- Acts as a stock substitute with lower capital requirement
- Provides the upside exposure necessary for the strategy
Short-Term Call
- Sold against the long position
- Typically 30-60 days until expiration
- Out-of-the-money or at-the-money
- Generates premium income to offset time decay
PMCC vs Traditional Covered Call
| Aspect | Traditional Covered Call | PMCC |
|---|---|---|
| Capital Required | 100% of stock price | Cost of long call only (typically 15-30% of stock price) |
| Risk Profile | Unlimited downside below breakeven | Defined risk (limited to net debit) |
| Return on Capital | Lower (due to higher capital outlay) | Potentially higher (due to leverage) |
| Dividends | Receive dividends | No dividend income |
| Assignment Risk | Minimal concern (can deliver shares) | Requires management if assigned |
PMCC Mechanics and Mathematical Foundation
Understanding the mathematical principles behind the PMCC strategy is essential for effective implementation and risk management. This section breaks down the key calculations and formulas that govern the strategy’s profitability.
Core PMCC Formulas
Initial Investment (Net Debit)
Net Debit = Cost of Long Call – Premium from Short Call
This represents your total capital outlay to establish the position.
Maximum Profit
Max Profit = (Strike Price of Short Call – Strike Price of Long Call) – Net Debit
This is achieved when the stock price is at or above the short call’s strike price at expiration.
Breakeven Point at Expiration
Breakeven = Strike Price of Long Call + Net Debit
The stock price must exceed this level at the long call’s expiration for the position to be profitable.
Maximum Risk
Max Risk = Net Debit
This is the total amount you can lose, which occurs if the stock price is below the long call’s strike price at expiration.
Return on Investment (ROI)
ROI = (Max Profit / Net Debit) × 100
This measures the efficiency of your capital utilization.
PMCC Greeks Analysis
Understanding the Greeks is crucial for managing a PMCC position effectively. Each Greek measures a different dimension of risk.
Delta (Δ)
Measures the position’s sensitivity to changes in the underlying stock price.
PMCC Delta: Δ_long_call – Δ_short_call
Typically positive but less than 1, indicating bullish but leveraged exposure.
Gamma (Γ)
Measures the rate of change of delta relative to price changes.
PMCC Gamma: Γ_long_call – Γ_short_call
Generally low due to offsetting positions, reducing sensitivity to large price moves.
Theta (Θ)
Measures time decay – how much the position gains or loses value each day.
PMCC Theta: Θ_long_call – Θ_short_call
Typically positive, as the short call’s decay outweighs the long call’s decay.
Vega (ν)
Measures sensitivity to changes in implied volatility.
PMCC Vega: ν_long_call – ν_short_call
Generally negative, as the position benefits from decreasing volatility.
Visualizing PMCC Profit and Loss Scenarios
Graphical representations help traders understand the risk/reward profile of PMCC positions under various market conditions. The following charts illustrate key concepts.
PMCC Profit/Loss Diagram at Expiration
Time Decay Impact on PMCC Value
PMCC vs Traditional Covered Call Comparison
Implementing a PMCC Calculator in Google Sheets
Google Sheets provides a powerful, accessible platform for creating custom PMCC calculators that can track positions, calculate key metrics, and visualize results. This section outlines how to build a comprehensive PMCC tracking system.
Google Sheets Setup Structure
Input Section
Create dedicated cells for all position parameters:
- Underlying stock symbol and current price
- Long call details: strike, expiration, cost
- Short call details: strike, expiration, premium received
- Number of contracts
- Commission costs
Calculation Section
Implement formulas to compute key metrics:
// Net Debit Calculation
= (LongCallPrice * 100 * Contracts) – (ShortCallPremium * 100 * Contracts) + Commission
// Maximum Profit Calculation
= ((ShortCallStrike – LongCallStrike) * 100 * Contracts) – NetDebit
// Breakeven Calculation
= LongCallStrike + (NetDebit / (100 * Contracts))
// Return on Investment
= (MaxProfit / NetDebit) * 100
Visualization Section
Use Google Sheets charts to create profit/loss diagrams:
- Create a data table with stock prices from well below to well above strike prices
- Calculate profit/loss at each price point using PMCC formulas
- Insert a line chart to visualize the profit/loss curve
- Add conditional formatting to highlight breakeven points
Advanced Google Sheets Features for PMCC
GOOGLEFINANCE Function
Automatically fetch current option prices and underlying stock data:
=GOOGLEFINANCE(“AAPL”,”price”)
=GOOGLEFINANCE(“OPTION:AAPL230616C00150000″,”price”)
Data Validation
Create dropdown menus for consistent data entry:
- Option expiration dates
- Strike price increments
- Position sizes
Conditional Formatting
Visual alerts for important thresholds:
- Highlight profitable vs unprofitable scenarios
- Flag positions with excessive risk
- Indicate when adjustments are needed
Script Automation
Use Google Apps Script for advanced functionality:
- Automated position tracking
- Email alerts for significant price movements
- Custom calculations beyond standard formulas
PMCC Risk Management Strategies
Effective risk management is crucial for long-term success with PMCC strategies. This section covers key principles and techniques for controlling risk while maximizing returns.
Position Sizing Principles
Capital Allocation
Limit PMCC positions to a percentage of your total portfolio:
- Conservative: 5-10% of portfolio per position
- Moderate: 10-15% of portfolio per position
- Aggressive: 15-25% of portfolio per position (not recommended for beginners)
Diversification
Spread risk across different underlying assets:
- Different sectors and industries
- Varied market capitalizations
- Mixed correlation profiles
Risk-Reward Assessment
Evaluate each potential PMCC trade using these criteria:
| Metric | Conservative | Moderate | Aggressive |
|---|---|---|---|
| Max Risk/Max Reward Ratio | 1:3 or better | 1:2 | 1:1.5 |
| Probability of Profit | 70%+ | 60-70% | 50-60% |
| Time to Expiration (Long Call) | 18-24 months | 12-18 months | 9-12 months |
Adjustment Strategies for PMCC Positions
Even well-planned PMCC positions may require adjustments as market conditions change. Here are common scenarios and appropriate responses:
Stock Price Declines Significantly
Scenario: Underlying drops well below long call strike
Adjustment: Roll short call down to lower strike (for credit if possible)
Alternative: Close position if thesis has fundamentally changed
Stock Price Rises Above Short Call
Scenario: Underlying approaches or exceeds short call strike
Adjustment: Roll short call up and out to higher strike/later expiration
Alternative: Allow assignment and reposition with new LEAPS
Implied Volatility Increases
Scenario: IV spike increases position value but also risk
Adjustment: Consider closing short call to capture volatility premium
Alternative: Implement volatility hedge with VIX products
Time Decay Accelerating
Scenario: Short call approaching expiration with significant value
Adjustment: Roll short call to next expiration cycle
Alternative: Close entire position if most of the premium is captured
Tax Implications of PMCC Strategies
Understanding the tax treatment of PMCC positions is essential for accurate profit calculation and compliance. Tax rules vary by jurisdiction, but several general principles apply.
Key Tax Considerations
Holding Periods
PMCC positions involve multiple components with different tax implications:
- Long call holding period begins when purchased
- Short calls are typically short-term positions
- Wash sale rules may apply if similar positions are opened within 30 days
Capital Gains Treatment
Profit/loss classification depends on holding periods:
- Long call held >1 year may qualify for long-term rates
- Short call premiums generally taxed as short-term gains
- Net losses may be deductible subject to limitations
Constructive Sale Considerations
In some jurisdictions, certain option strategies may trigger constructive sale rules, which could accelerate tax liabilities. Consult with a tax professional to understand how these rules might apply to your PMCC positions.
Tracking for Tax Purposes
Maintain detailed records of all PMCC transactions:
- Entry and exit dates for each leg
- Cost basis calculations
- Commission and fee tracking
- Adjustment history for complex positions
PMCC Case Study: AAPL Position Analysis
To illustrate PMCC implementation, let’s examine a detailed case study using Apple Inc. (AAPL) as the underlying security.
Position Setup
Initial Conditions (January 2023)
- AAPL stock price: $140
- Market outlook: Moderately bullish
- Volatility environment: Moderate (IV ~25%)
Position Details
- Long call: Jan 2025 $120 call @ $32.50
- Short call: Mar 2023 $150 call @ $3.20
- Contracts: 5
- Net debit: $29.30 per share ($14,650 total)
Position Analysis
| Metric | Calculation | Value |
|---|---|---|
| Net Debit | $32.50 – $3.20 = $29.30 | $14,650 (5 contracts) |
| Max Profit | ($150 – $120 – $29.30) × 100 × 5 | $3,500 |
| Breakeven | $120 + $29.30 | $149.30 |
| Max Risk | Net debit | $14,650 |
| Return on Investment | $3,500 / $14,650 × 100 | 23.9% |
Scenario Analysis
Bear Case (AAPL at $110)
Long call has intrinsic value of $0, short call expires worthless
Result: Loss of $14,650 (100% of net debit)
Neutral Case (AAPL at $140)
Long call has intrinsic value of $20, short call expires worthless
Result: Loss of $4,650 (position value: $10,000)
Bull Case (AAPL at $160)
Long call has intrinsic value of $40, short call exercised at $150
Result: Profit of $3,500 (max profit achieved)
Conclusion
The Poor Man’s Covered Call is a sophisticated options strategy that offers traders a capital-efficient alternative to traditional covered calls. When implemented correctly with proper risk management, it can generate consistent income with defined risk parameters.
Key success factors for PMCC trading include:
- Selecting appropriate underlying securities with bullish long-term outlooks
- Choosing deep in-the-money LEAPS with sufficient time until expiration
- Implementing strict position sizing and diversification rules
- Monitoring positions regularly and making adjustments as needed
- Using tools like Google Sheets for systematic tracking and analysis
While PMCC strategies offer attractive risk-reward profiles, they require ongoing management and a solid understanding of options mechanics. Traders should paper trade the strategy extensively before committing significant capital and consider consulting with a financial advisor to ensure the approach aligns with their overall investment objectives and risk tolerance.
Frequently Asked Questions
What is the ideal time to expiration for the long call in a PMCC?
For most PMCC positions, the long call should have at least 12-24 months until expiration. This provides sufficient time for the strategy to work while minimizing the impact of time decay on the long position. Shorter durations increase gamma risk and reduce the strategy’s effectiveness.
How deep in-the-money should the long call be?
The long call should typically have a delta of 0.80 or higher, which generally means it’s deep in-the-money. This ensures the position behaves similarly to owning the underlying stock while maintaining the capital efficiency advantage. A higher delta also reduces the impact of time decay on the long position.
What happens if my short call gets assigned?
If assigned on the short call, you’ll be obligated to sell shares at the strike price. Since you don’t own the shares, you’ll need to either exercise your long call (using the proceeds from the assigned sale to cover the exercise cost) or purchase shares in the market to fulfill the obligation. This typically results in realizing the maximum profit for that cycle, though transaction costs may reduce returns slightly.
Can I implement a PMCC in an IRA account?
This depends on your broker’s specific rules for IRA accounts. Some brokers allow level 2 options strategies (including PMCC) in IRA accounts, while others restrict options trading to covered calls and cash-secured puts only. Check with your broker regarding their specific requirements and limitations for options trading in retirement accounts.
How does volatility impact PMCC positions?
PMCC positions generally have negative vega, meaning they benefit from decreasing implied volatility. When volatility increases, the value of both options increases, but the short call (with higher vega) typically increases more than the long call, creating a temporary paper loss. Conversely, decreasing volatility helps the position. Traders should be aware of earnings announcements and other events that might cause volatility spikes.
What is the best way to select strike prices for the short call?
The short call strike should be selected based on your outlook for the underlying stock. A more conservative approach uses out-of-the-money strikes with lower deltas (0.20-0.30), offering more upside protection but lower premium income. A more aggressive approach uses at-the-money or slightly in-the-money strikes for higher premium but greater risk of assignment. The strike should also provide an attractive risk-reward ratio when considering the net debit and width between strikes.
How often should I roll the short call in a PMCC?
The short call is typically rolled when it approaches expiration (within 2-3 weeks) or when it moves deep in-the-money. Ideally, you want to roll for a credit to a later expiration while potentially adjusting the strike price based on the new stock price. The specific timing depends on factors such as remaining time value, implied volatility, and your updated outlook for the underlying stock.