Poor Man Covered Calls Strategy

The Poor Man Covered Call (PMCC) allows you to generate income like a covered call without owning 100 shares. It uses a long-term LEAPS call as a stock surrogate and sells shorter-term calls for premium income.

Strategy Overview

What You Need

  • LEAPS Call option (1+ year out)
  • Options-enabled trading account
  • Understanding of Covered Calls

Risk Level

Moderate

More capital-efficient than traditional covered calls but requires careful management of LEAPS and short-term calls.

Time Commitment

  • Initial setup: 30–45 minutes
  • Monitoring: 15–20 minutes/week
  • Trade management: Monthly or as needed

Essential Knowledge:

How Poor Man Covered Calls Work

Think of it as a “mini” covered call. Instead of owning 100 shares of a stock, you own a deep in-the-money LEAPS call to simulate the stock, then sell shorter-term calls against it to collect premium.


Step-by-Step Setup:

  • Step 1: Buy a LEAPS Call (deep in-the-money, 12+ months out)
  • Step 2: Sell a near-term out-of-the-money call to generate income
  • Step 3: Manage positions by rolling short calls and monitoring LEAPS value

Step-by-Step Implementation

1. Select LEAPS

  • Deep in-the-money for higher delta
  • 1+ year until expiration
  • Good liquidity
Pro Tip: Deep ITM LEAPS behave more like owning stock with less capital

2. Choose Short-Term Call

  • Near-term expiration for faster premium decay
  • Out-of-the-money to allow some stock upside
  • Consider technical levels for strike selection

3. Manage Positions

  • Rolling the Covered Calls to extend income or avoid assignment
  • Monitor LEAPS value to protect upside
  • Adjust strikes and expiration as needed

Real-World Example

Scenario: XYZ at $100 (as of August 24, 2025)

Trade Setup:

  • Buy 1 XYZ Jan 2027 $80 LEAPS call for $25 ($2,500) – simulates owning 100 shares with lower capital.
  • Sell 1 Oct 2025 $105 call for $2 premium ($200 credit).
  • 45 days to short-term expiration.

Note: Dates updated to be forward-looking. The LEAPS is deep ITM (delta ~0.9), acting as a stock substitute.

Why PMCC Over Traditional Covered Call?

A traditional covered call requires buying 100 shares ($10,000 at $100/share) and selling a short call. PMCC uses a LEAPS instead, reducing capital to ~$2,500 while mimicking the strategy. This increases ROI on capital (~8% vs 2%), offers leverage, and provides flexibility. Keep in mind, PMCC carries additional risks from LEAPS time decay and lacks dividend income.

Tradeoffs:

Aspect Covered Call Poor Man's Covered Call Implication
Capital Needed High ($10,000+) Low ($2,000–$4,000) Accessible but riskier if stock drops sharply.
Return on Capital Lower Higher PMCC amplifies gains/losses due to leverage.
Downside Protection Strong (own stock) Weaker (LEAPS theta/vega risk) Traditional better for conservative holds; PMCC for active traders.
Upside Potential Capped at short strike + premium Capped, but LEAPS provides leveraged upside until assignment Similar cap, but PMCC can be rolled more easily.
Risk Stock decline minus premium LEAPS can expire worthless; assignment complexity Requires monitoring to avoid unwanted assignment.

What Happens if Short Strike is Challenged?

If XYZ approaches or exceeds $105 before expiration, the short call gains value, creating unrealized losses. Possible actions:

  • Buy back the short call and roll to a higher strike or later expiration.
  • Let it expire ITM, potentially resulting in assignment.

Possible Outcomes at Short Call Expiration

If XYZ Stays Below $105
  • Keep the LEAPS call and the $200 premium as profit.
  • Short-term return: ~8% on $2,500 invested (before fees).
  • Roll strategy: Sell another short-term call next month against the same LEAPS.
  • The LEAPS continues simulating 100 shares, retaining intrinsic value.
If XYZ Rises Above $105 (Short Call Assigned)
  • Assigned: Obligated to sell 100 shares at $105.
  • Exercise the LEAPS: Pay $8,000 to buy 100 shares at $80 to cover the assignment to sell 100 shares.
  • Net Result:
    • LEAPS cost: -$2,500
    • Premium received: +$200
    • Assignment proceeds: +$10,500
    • Exercise cost: -$8,000
    • Total Profit: $200
  • Upside: Gain spread ($105 - $80 = $25) minus LEAPS extrinsic cost, plus premium. LEAPS used to cover delivery.
  • If stock rises above $120, net profit increases but capped by short strike.

Recap & Practical Checklist

Quick Recap

  • Buy deep ITM LEAPS → simulate stock ownership
  • Sell short-term calls for income
  • Roll calls when approaching strike/expiration

PMCC Checklist

✅ LEAPS selected and affordable?

✅ Short-term call strike appropriate?

✅ Monitor positions weekly?

✅ Ready to roll or adjust as needed?

Common Mistakes

❌ Buying LEAPS too far out-of-the-money

❌ Selling calls too close to LEAPS value

❌ Ignoring assignment risk

❌ Skipping regular monitoring

Next Steps

  • Start small with 1–2 contracts
  • Track premiums and LEAPS value
  • Review trade outcomes monthly
  • Combine with other strategies once comfortable

PMCC lets you generate income with less capital than traditional covered calls. Consistent monitoring and proper strike selection are key to success.

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