Buy Leap Sell | Covered Call

However, the PMCC is not without unique risks, most notably the "upside gap" risk. In a traditional covered call, if the stock price skyrockets past the short strike, the investor simply sells their shares at a profit. In a PMCC, if the stock price rises too quickly, the short call may become deeply ITM while the LEAPS has not gained enough value to cover the obligation, especially if the spread was set up with a narrow width between the long and short strikes. To mitigate this, traders must ensure that the total debit paid for the spread is less than the distance between the two strike prices. If the stock price exceeds the short strike, the trader may be forced to close the entire position for a loss or a smaller-than-expected profit.

Time decay, or theta, also plays a dual role in this strategy. The short-term call benefits from rapid theta decay, which works in the trader's favor. Conversely, the LEAPS position also loses value over time, though at a much slower rate. The success of the PMCC depends on the "theta spread"—the difference between the daily decay of the short call and the long call. As long as the short call decays faster than the LEAPS, the trader captures a net positive time value. buy leap sell covered call

AI responses may include mistakes. For financial advice, consult a professional. Learn more However, the PMCC is not without unique risks,