Poor Man's Covered Call

What is a Poor Man's Covered Call?

A poor man's covered call (PMCC) replaces the 100 shares in a traditional covered call with a deep in-the-money LEAPS call option. You buy a long-dated deep ITM call as your "stock replacement" and then sell short-term out-of-the-money calls against it, just like you would in a regular covered call.

The advantage is capital efficiency. Instead of spending $10,000 on 100 shares of a $100 stock, you might spend $2,500-$3,500 on a LEAPS call that behaves similarly to the stock. You then collect premium by selling monthly calls against it.

How to Set It Up

Buy 1 deep ITM LEAPS call with 12-24 months to expiration (the long leg)
Sell 1 OTM call with 20-45 days to expiration (the short leg)
The long call strike should be deep ITM, typically 70-80 delta. A strike 15-20% below current price.
The short call strike should be OTM, typically above the current stock price. 30-40 delta or above resistance.
The short call must expire before the long call. You will roll the short call monthly.

The net debit is the LEAPS cost minus the first short call credit.

When to Use This Strategy

Use a poor man's covered call when:

You are bullish on a stock and want covered-call-like income
You do not have enough capital to buy 100 shares
You want to leverage your capital more efficiently
You plan to sell short-term calls repeatedly over many months
The stock has options with sufficient liquidity in longer-dated expirations

This strategy is ideal for expensive stocks where buying 100 shares would tie up too much capital. Think stocks like AAPL, MSFT, AMZN, or GOOGL.

Example Trade

Stock XYZ is trading at $100. You want covered-call-like income.

Buy 1 XYZ $80 call expiring in 18 months for $24.00 ($2,400)
Sell 1 XYZ $105 call expiring in 30 days for $1.50 ($150)
Net debit: $24.00 - $1.50 = $22.50 ($2,250)

Versus buying 100 shares at $10,000, you have deployed only $2,250.

Month 1: XYZ stays at $100. The $105 call expires worthless. You keep $150. Sell a new call for month 2. Your LEAPS is worth roughly $24-$25.

Month 1: XYZ goes to $107. The $105 call is ITM. You can roll it up and out (buy back the $105, sell a $110 at a later date) for a small credit or debit. Or close the whole trade. The LEAPS gained value, so you profit overall.

Month 1: XYZ drops to $92. The $105 call expires worthless ($150 kept). Your LEAPS dropped in value to roughly $18-$19. You are down on paper but sell a new call for month 2 to continue collecting income.

After 6 months of selling calls at ~$1.50/month: You have collected roughly $900 in premium, reducing your LEAPS cost basis from $2,400 to $1,500.

Risk and Reward

Max profit per cycle: (Short strike - current stock price + premium) when the stock reaches the short strike. Long-term profit comes from accumulating premium over many cycles.
Max loss: The cost of the LEAPS minus all premiums collected. If the stock crashes and the LEAPS expires worthless, you lose the remaining cost basis.
Breakeven: LEAPS strike + net debit. $80 + $22.50 = $102.50 initially, improving with each premium collected.

Over time, the repeated premium collection can reduce your cost basis dramatically, similar to how covered calls work with stock.

Tips and Common Mistakes

Buy deep ITM LEAPS (70-80 delta minimum). Cheap OTM LEAPS do not behave like stock and will decay too much.
Do not sell the short call with a strike below your LEAPS cost basis. If assigned, you want to have a profit, not a loss.
Roll the LEAPS 60-90 days before it expires to avoid accelerating time decay.
The short call strike must always be above the LEAPS strike to maintain a debit spread structure.
Account for the fact that you do not receive dividends. The LEAPS does not pay dividends, so factor that into your return calculations.

Related Strategies

Covered Call — the traditional version using 100 shares
LEAPS — the standalone long-term call without the short call overlay
Call Diagonal Spread — the generalized version of this setup