A poor man’s covered call (PMCC) is a long diagonal call spread that mimics a covered call for a fraction of the capital. Instead of buying 100 shares, you buy one deep in-the-money, long-dated LEAPS call to act as a stock substitute, then sell shorter-dated out-of-the-money calls against it to collect income. You get most of the upside and recurring premium of a covered call while tying up far less cash.
Why it is called a “poor man’s” covered call
A traditional covered call on a $100 stock requires about $10,000 to buy 100 shares. The poor man’s version replaces those shares with a single deep in-the-money LEAPS call that might cost $2,000 to $3,000 and behaves almost like the stock because of its high delta. You still sell a short call against it each cycle, so the income mechanics are the same. The name simply reflects the lower capital requirement, not lower sophistication.
How to set up a poor man’s covered call
- Buy the long LEAPS call. Choose an expiration 6 to 12 months or more out and a deep in-the-money strike with a delta of about 0.80 or higher, so it tracks the stock closely.
- Sell the short call. Sell an out-of-the-money call 30 to 45 days out, the same way you would in a normal covered call.
- Keep the net debit below the strike width. Make sure what you pay for the spread is less than the distance between your two strikes, so the structure can finish profitable.
- Manage each cycle. Let the short call expire or buy it back, then sell a new one. Roll the long LEAPS well before it loses its time value.
A worked PMCC example
The stock trades at $100. You buy a one-year $80 LEAPS call for $24.00 ($2,400) with a delta near 0.82. You sell a 30-day $110 call for $2.00 ($200). Your net debit is $22.00, or $2,200 of capital at risk versus $10,000 to own the shares outright.
| Metric | Formula | This example |
|---|---|---|
| Net debit (capital at risk) | Long call cost − short call credit | $24.00 − $2.00 = $22.00, or $2,200 |
| Capital vs 100 shares | Net debit ÷ share cost | $2,200 vs $10,000 (about 78% less) |
| Strike width | Short strike − long strike | $110 − $80 = $30 |
| Approx. max profit | Width − net debit (+ residual time value) | $30 − $22 = about $8.00, or roughly $800 |
| Approx. max loss | Net debit paid | $2,200 if the stock falls well below $80 |
| Income per cycle | Short call premium | $200, repeatable each expiration |
The “net debit below strike width” rule is the heart of the trade. Because $22 is less than the $30 width, the spread has room to make money if the stock drifts up toward the short strike. The exact profit depends on how much time value remains in the LEAPS, so model your specific strikes on the covered call calculator and price the long leg on the long call option calculator.
PMCC vs a traditional covered call
| Feature | Poor man’s covered call | Traditional covered call |
|---|---|---|
| Capital required | Cost of the LEAPS (much lower) | Full cost of 100 shares |
| Long leg | Deep ITM LEAPS call | 100 actual shares |
| Dividends | Not received | Received on the shares |
| Time decay on long leg | Yes, the LEAPS loses theta | None, shares do not decay |
| Max loss | Net debit paid | Share cost minus premium |
| Best for | Smaller accounts seeking leverage | Investors who want to hold shares and dividends |
Benefits and trade-offs
- Benefit: capital efficiency. You control 100 shares’ worth of exposure for a fraction of the cost, freeing capital for other positions.
- Benefit: defined risk. Your maximum loss is limited to the net debit, unlike owning shares where the dollar loss is larger.
- Trade-off: theta on the long call. The LEAPS slowly loses time value, so the short-call income has to outpace that decay.
- Trade-off: no dividends. You do not own the shares, so you collect no dividends and have no voting rights.
- Trade-off: assignment management. If the short call goes deep in the money, you may need to roll it to avoid early assignment that forces you to exercise or close the long leg.
Common mistakes to avoid
- Choosing a long call with too little delta, so it does not track the stock and behaves more like a speculative bet.
- Paying a net debit larger than the width between strikes, which removes the structural edge.
- Selling the short call too close to the long strike, which caps profit before the trade can work.
- Letting the LEAPS run too close to its own expiration, where time decay accelerates.
Frequently asked questions
What delta should the long LEAPS call have?
Most traders target a delta of 0.80 or higher so the long call moves nearly point for point with the stock. A high delta means the LEAPS behaves like a stock substitute, which is what makes the poor man’s covered call resemble a real covered call.
Is a poor man’s covered call riskier than a covered call?
It uses leverage, so percentage swings on your capital are larger, but the maximum dollar loss is limited to the net debit, which is smaller than the cost of owning shares. The main added risk is time decay on the long call and the need to manage rolls, not unlimited loss.
What happens if the short call is assigned?
You would be short 100 shares, which you can cover by exercising or selling part of your long LEAPS call. Most traders avoid this by rolling the short call up and out before it goes deep in the money, especially near an ex-dividend date.
Do I get dividends with a poor man’s covered call?
No. Because you hold a call option instead of the actual shares, you do not receive dividends. If dividend income is a priority, a traditional covered call on the shares is the better fit.
