Poor Man's Covered Put

What is a Poor Man's Covered Put?

A poor man's covered put (PMCP) is the bearish cousin of the poor man's covered call. Instead of owning short stock and selling puts against it, you buy a deep in-the-money LEAPS put and sell short-term puts against it. The LEAPS put acts as a substitute for the short stock position, and the short-term put you sell generates income — just like a traditional covered put would.

The beauty of this strategy is capital efficiency. Shorting 100 shares of a $100 stock ties up significant margin. A deep ITM LEAPS put might cost $15-20 per share, giving you similar downside exposure at a fraction of the capital. Then you sell puts against it repeatedly, collecting income over time.

How to Set It Up

• Buy 1 deep ITM LEAPS put with 6-12 months to expiration (delta of -0.70 to -0.85)
• Sell 1 short-term OTM put with 30-45 days to expiration
• Short put strike should be below the current stock price
• Strike selection for LEAPS: Go deep ITM. The higher the strike, the more it behaves like short stock. Choose a delta of at least -0.70.
• Strike selection for short put: Choose a strike at or below where you expect support. 20-30 delta is common.
• The short put strike must be below the LEAPS put strike to maintain a diagonal spread structure.

You are essentially running a put diagonal spread, but thinking about it as covered-put income.

When to Use This Strategy

Use a poor man's covered put when:

• You are moderately bearish on a stock and want to generate income from that view
• You want short-stock-like exposure without the full margin requirements
• You want to sell puts repeatedly against a longer-dated bearish position
• Implied volatility on short-term options is elevated relative to longer-term options
• You want a more patient approach to profiting from a bearish thesis

This works best when the stock drifts lower slowly or stays flat. A crash is good for the LEAPS but may blow through your short put. A rally hurts the LEAPS but the short put expires worthless.

Example Trade

Stock XYZ is trading at $100. You are bearish over the next several months.

• Buy 1 XYZ $115 put (9 months out, deep ITM) for $18.00
• Sell 1 XYZ $95 put (45 days out) for $1.50
• Net debit: $18.00 - $1.50 = $16.50 ($1,650 total)

If XYZ drops to $95 at short put expiration: The LEAPS put is worth approximately $21 (gained $3 in value). The short put expires at the money — worthless or pennies. You keep the $1.50 and can sell another short put. Net position is improving.

If XYZ drops to $90: The LEAPS put gains significantly. The short $95 put is ITM and costs $5. But you can roll it down and out, or close the whole trade for a profit since the LEAPS gained more than the short put lost.

If XYZ rallies to $105: The LEAPS loses value (now less ITM). The short $95 put expires worthless — you keep $1.50. Sell another put next month. The income from short puts cushions the LEAPS loss.

Risk and Reward

• Max profit: (LEAPS strike - short put strike - net debit) x 100. In our example: ($115 - $95 - $16.50) x 100 = $350. This is the max at the short put expiration. Over time, repeated short put sales increase total income.
• Max loss: Net debit paid. $1,650. This happens if the stock rallies hard and both puts lose all value. The LEAPS protects you from losing more than what you paid.
• Breakeven: Varies depending on how many short puts you sell and at what price. Generally, the LEAPS strike minus the net cost.

The key to profitability is selling enough short-term premium over the life of the LEAPS to offset the time decay on the LEAPS itself.

Tips and Common Mistakes

• Go deep ITM on the LEAPS. If the LEAPS is not deep enough, it will not track the stock well on the downside and you lose the "covered put" effect.
• Do not let the short put get tested without a plan. If the stock drops through the short strike, either close the short put or roll it down and out.
• Sell premium monthly. The goal is to keep selling short-term puts against the LEAPS to chip away at the cost basis.
• Watch for volatility changes. If IV drops significantly, the LEAPS loses value faster than expected. This strategy works best when IV is stable or rising.
• Close the whole position if your thesis changes. If you are no longer bearish, do not hold on hoping the income will save you.

Related Strategies

• Poor Man's Covered Call — the bullish version using LEAPS calls
• Covered Put — the traditional version using short stock
• Put Diagonal Spread — the underlying structure of this strategy