The Poor Man's Covered Call, often abbreviated as PMCC, is a popular options strategy that mimics the traditional covered call but requires significantly less capital. Instead of buying 100 shares of stock, you purchase a long-term call option (LEAPS) and sell short-term calls against it. This guide will teach you everything you need to know about this capital-efficient strategy.
What is a Poor Man's Covered Call?
A Poor Man's Covered Call is a diagonal spread that replicates the payoff of a traditional covered call. You buy a deep in-the-money LEAPS call option with at least 6-12 months until expiration, then sell shorter-term out-of-the-money calls against it to generate income.
The key advantage: Instead of spending $10,000 to buy 100 shares of a $100 stock, you might spend $2,000-$3,000 on a LEAPS call option. This frees up capital and reduces your maximum risk while still allowing you to collect premium from selling calls.
How to Set Up a Poor Man's Covered Call
Setting up a PMCC involves two legs that work together:
Step 1: Buy the Long LEAPS Call
Purchase a deep in-the-money call option with the following characteristics:
- Expiration: At least 6-12 months out (longer is often better)
- Strike price: Deep in-the-money, typically with a delta of 0.70 to 0.85
- Goal: The LEAPS should behave similarly to owning 100 shares
Step 2: Sell the Short-Term Call
Sell an out-of-the-money call option against your LEAPS:
- Expiration: 30-45 days out typically works best
- Strike price: Out-of-the-money, above the current stock price
- Goal: Collect premium as the short call decays
Example Setup
Stock XYZ is trading at $100. You are bullish and want exposure without buying shares.
- Buy the January 2027 $70 call for $35.00 ($3,500 total)
- Sell the February 2026 $105 call for $2.50 ($250 credit)
- Net debit: $32.50 per share ($3,250 total)
Compare this to buying 100 shares at $100, which would cost $10,000. You have reduced your capital requirement by 67.5%.
The Critical PMCC Rule
There is one essential rule you must follow with the Poor Man's Covered Call to avoid turning a winning trade into a loser:
Never pay more for the LEAPS than you can collect if called away. Your short call strike minus your LEAPS strike should be greater than your net debit paid.
Using our example above:
- Short call strike: $105
- LEAPS strike: $70
- Difference: $35
- Net debit paid: $32.50
- Maximum profit if called away: $35 - $32.50 = $2.50 per share ($250)
Managing Your PMCC Position
When the Short Call Expires Worthless
This is the ideal outcome. Your short call expires worthless, you keep the entire premium, and you can sell another call against your LEAPS. Rinse and repeat for ongoing income.
When the Stock Rises Above Your Short Strike
You have several choices:
- Let it get called away: Close the entire position for your maximum profit
- Roll the short call: Buy back the short call and sell a higher strike or later expiration
- Close early: Take profits before expiration if the position reaches your target
When the Stock Drops Significantly
If the stock drops, your LEAPS will lose value faster than you can collect from selling calls. Consider:
- Rolling the short call down to collect more premium
- Closing the position if your outlook has changed
- Holding if you remain bullish long-term
Rolling Example
Your February $105 short call is expiring worthless. The stock is now at $102.
- Let the February $105 call expire worthless (keep $250)
- Sell the March $107 call for $2.00 ($200 credit)
- You have now collected $450 total in premium
Advantages of the Poor Man's Covered Call
- Capital efficiency: Requires 60-80% less capital than buying shares
- Defined risk: Maximum loss is limited to your net debit paid
- Leverage: Control 100 shares worth of exposure with less money
- Ongoing income: Sell calls repeatedly against your LEAPS position
- No dividend risk: You cannot be assigned early for dividend capture
Risks and Disadvantages
- Time decay on LEAPS: Your long option loses value over time
- No actual stock ownership: You do not receive dividends
- Complexity: More moving parts than simply buying shares
- Opportunity cost: If the stock skyrockets, your gains are capped
- Wider bid-ask spreads: LEAPS can have less liquidity
Best Stocks for PMCC Strategy
The Poor Man's Covered Call works best on certain types of stocks:
- Highly liquid stocks: Tight bid-ask spreads on options
- Low or no dividend: No advantage lost from not owning shares
- Moderately bullish outlook: You expect slow, steady appreciation
- Lower implied volatility: LEAPS are cheaper to purchase
PMCC vs Traditional Covered Call
| Factor | Traditional Covered Call | Poor Man's Covered Call |
|---|---|---|
| Capital Required | Full stock price x 100 | LEAPS premium only |
| Maximum Risk | Stock can go to zero | Limited to net debit |
| Dividends | Received | Not received |
| Early Assignment Risk | Possible | Less common |
Tips for Success
- Buy LEAPS with high delta: A delta of 0.75 or higher ensures your LEAPS moves closely with the stock
- Give yourself time: Buy LEAPS with at least 9-12 months until expiration
- Be consistent: Sell calls every 30-45 days for optimal theta decay
- Track your cost basis: Keep careful records of all premium collected
- Know when to exit: If the stock breaks down, do not hold hoping for recovery
Track Your PMCC Trades Automatically
Pro Trader Dashboard syncs with your brokerage to track all your options trades, including complex strategies like the Poor Man's Covered Call. See your total premium collected, win rate, and P/L in real-time.
Summary
The Poor Man's Covered Call is an excellent strategy for traders who want covered call exposure without tying up significant capital. By using LEAPS as a stock substitute, you can reduce your capital requirement by 60-80% while still generating consistent income from selling calls. Remember to follow the critical rule: never pay more for your LEAPS than you can collect if called away. With proper management and realistic expectations, the PMCC can be a powerful addition to your trading toolkit.
Want to learn more advanced strategies? Check out our guides on jade lizard spreads or iron condors.