The poor man's covered call (PMCC) is a popular options strategy that mimics a traditional covered call but requires significantly less capital. By using a long-term LEAPS call option instead of stock, traders can generate income through selling short-term calls while maintaining bullish exposure. This guide explains how the PMCC works and when to use it.
What is a Poor Man's Covered Call?
A poor man's covered call is a diagonal spread consisting of:
- Buying a long-dated, in-the-money call option (the LEAPS)
- Selling a short-dated, out-of-the-money call option
Why "poor man's"? A traditional covered call requires buying 100 shares of stock, which can cost $10,000+ for a $100 stock. The PMCC replaces the stock with a LEAPS option costing perhaps $2,000-$4,000, making the strategy accessible with less capital.
How the PMCC Works
The strategy works by using the LEAPS call as a stock substitute while selling short-term premium:
The Long LEAPS Call
- Expiration: 6-24 months out
- Strike: Deep in-the-money (high Delta, typically 0.70-0.85)
- Acts like synthetic stock ownership
- Provides downside protection compared to owning shares
The Short Call
- Expiration: 30-45 days out
- Strike: Out-of-the-money (above current stock price)
- Generates income through premium collection
- Can be sold repeatedly as each expires
Example: Setting Up a PMCC
Stock XYZ is trading at $100. You are bullish but do not want to invest $10,000.
- Buy 1 LEAPS call, $80 strike, 18 months out, for $25.00 ($2,500)
- This call has Delta of 0.80, acting like 80 shares
- Sell 1 call, $105 strike, 45 days out, for $1.50 ($150)
Net investment: $2,500 - $150 = $2,350 (vs $10,000 for stock)
You can repeat selling the short call every 30-45 days.
The PMCC Setup Rules
To set up a proper PMCC, follow these guidelines:
Rule 1: Deep ITM LEAPS
Your long call should be deep in-the-money with Delta of 0.70 or higher. This ensures the LEAPS behaves like stock and has minimal extrinsic value (less Theta decay).
Rule 2: Short Strike Above LEAPS Break-Even
The short call strike should be higher than your LEAPS break-even price (LEAPS strike + premium paid). This ensures you profit if assigned.
Rule 3: Time Premium Management
Choose a LEAPS with at least 6 months remaining. Roll it forward before it drops below 4-6 months to maintain favorable Theta characteristics.
Key insight: The ideal PMCC LEAPS has minimal extrinsic value. A $80 strike call on a $100 stock should cost around $22-25 (mostly intrinsic value). If it costs $30+, you are paying too much time premium.
Profit and Loss Scenarios
Maximum Profit
Occurs when the stock rises to the short call strike at expiration:
- LEAPS value increases
- Short call expires worthless or is closed for minimal value
- You keep the premium and can sell another call
Maximum Loss
Occurs if the stock drops significantly and the LEAPS loses most of its value:
- Limited to net debit paid (LEAPS cost - premiums collected)
- Still better than owning stock outright in a crash
Break-Even
Stock price where the LEAPS gains offset the net debit. Roughly equal to LEAPS strike plus net premium paid.
Example: PMCC Outcomes
Using the previous example (LEAPS $80 strike for $25, short $105 call for $1.50):
Scenario 1: Stock at $105 at short expiration
- LEAPS worth approximately $27-28 (was $25)
- Short call expires worthless
- Profit: $250-300 on LEAPS + $150 premium = $400-450
- Return on $2,350 investment: 17-19%
Scenario 2: Stock at $85
- LEAPS worth approximately $8-10
- Short call expires worthless ($150 kept)
- Loss: $1,500-1,700 on LEAPS, offset by $150 premium
Managing the Short Call
The ongoing management of short calls is crucial to PMCC success:
If the Short Call is Profitable
- Let it expire worthless, or
- Buy it back cheap (e.g., at $0.10) and sell a new one
If the Short Call is Threatened
- Roll up and out: Buy back current call, sell higher strike with later expiration
- Close both legs if assignment risk is too high
- Accept assignment if profitable (rarely recommended)
If Assigned on Short Call
- Exercise your LEAPS to deliver shares
- Profit = short strike - LEAPS strike - net premium paid
- This is actually a profitable outcome if set up correctly
PMCC vs Traditional Covered Call
Advantages of PMCC
- Lower capital requirement (60-80% less)
- Limited downside risk (vs unlimited for stock)
- Higher percentage returns possible
- No dividend tax implications
Disadvantages of PMCC
- LEAPS has time decay (stock does not)
- No dividend collection
- More complex to manage
- Assignment handling is trickier
- Wider bid-ask spreads on LEAPS
Best Stocks for PMCC
The strategy works best on:
- Stable, moderately bullish stocks: Not too volatile, steady uptrend
- High liquidity options: Tight spreads on LEAPS
- Lower IV stocks: Cheaper LEAPS with less extrinsic premium
- Stocks you would want to own: Still need bullish conviction
Track Your PMCC Positions
Pro Trader Dashboard tracks diagonal spreads including poor man's covered calls. See your Greeks, profit targets, and manage multiple legs all in one place.
Common PMCC Mistakes
- LEAPS not deep enough ITM: High extrinsic value leads to poor performance.
- Short strike too aggressive: Getting assigned without profit upside.
- Not rolling LEAPS in time: Waiting until less than 3-4 months remaining.
- Ignoring IV on LEAPS: Buying when IV is high inflates the cost.
- Over-leveraging: Running too many PMCCs vs capital available.
Summary
The poor man's covered call is an efficient alternative to traditional covered calls, requiring 60-80% less capital while maintaining similar income potential. By buying a deep ITM LEAPS and repeatedly selling short-term calls, traders can generate consistent income with defined risk. Success requires proper setup, active management, and understanding of the Greeks involved.
Learn more about related strategies in our guides on covered calls, calendar spreads, and diagonal spreads.