Poor Man's Covered Call (PMCC)
The poor man's covered call uses a deep ITM LEAPS call instead of 100 shares, slashing capital requirements by 60-80% while generating similar income from selling short-term calls.
What is Poor Man's Covered Call (PMCC)?
Poor Man's Covered Call (PMCC) is a diagonal debit spread that replaces stock ownership with a deep in-the-money LEAPS call, then sells short-term out-of-the-money calls against it to generate income, mimicking a covered call at a fraction of the capital.
The PMCC is ideal for traders who want covered-call-like income but cannot afford to buy 100 shares of expensive stocks like AMZN, GOOGL, or TSLA.
TL;DR - Quick Summary
PMCC = Buy 1 deep ITM LEAPS call (6-12 months out) + Sell 1 short-term OTM call (30-45 DTE). The LEAPS acts as a stock substitute. You collect premium from selling calls, just like a covered call, but with 60-80% less capital.
What is a Poor Man's Covered Call?
A poor man's covered call (PMCC) is a capital-efficient way to generate covered-call income without buying 100 shares of stock. Instead of owning shares, you buy a deep in-the-money LEAPS call option (6-24 months to expiration) and sell short-term out-of-the-money calls against it.
Why "poor man's"? Because you can run this strategy with a fraction of the capital. Owning 100 shares of AMZN at $185 costs $18,500. A deep ITM LEAPS on AMZN might cost $4,500. You save $14,000 while generating similar monthly income.
Structure: Buy 1 deep ITM LEAPS call (delta 0.70-0.85, 6-12+ months out) + Sell 1 OTM call (30-45 DTE). Roll the short call monthly to keep collecting premium.
Setup & Example
AAPL PMCC Example
AAPL trading at $185. Traditional covered call requires $18,500 for shares.
- Buy: AAPL $150 call, 12 months out, for $42.00 ($4,200). Delta: 0.80.
- Sell: AAPL $190 call, 45 DTE, for $3.50 ($350).
- Net debit: $3,850. Capital savings: $14,650 vs owning shares.
If AAPL stays below $190 at the short call's expiration, you keep the $350 and sell another call. That is a 9.1% return on capital in 45 days. Repeat 8 times per year for potential annualized income of 70%+ on capital deployed.
LEAPS Selection Rules
- Delta: 0.70-0.85 (deep ITM so it tracks stock closely)
- Expiration: 6-24 months (longer = more cost but slower decay)
- Extrinsic value: Keep it low. Most of the LEAPS price should be intrinsic value.
Profit & Loss Scenarios
Best case: Stock rises slowly
AAPL drifts from $185 to $189. Your LEAPS gains value, your short call expires worthless, and you sell another call. Both the LEAPS appreciation and premium income work in your favor.
Worst case: Stock drops sharply
AAPL drops to $160. Your LEAPS loses roughly $20 in value (delta 0.80 x $25 drop). The short call expires worthless ($350 gain), partially offsetting. Net loss: approximately $1,650. If AAPL drops below $150 (your LEAPS strike), losses accelerate.
Risk scenario: Stock rallies past short call
AAPL jumps to $200. Your $190 short call is $10 ITM, but your $150 LEAPS is $50 ITM. You can close both for a profit, or roll the short call higher and out in time.
Key Takeaways
- ✓ PMCC = deep ITM LEAPS + short-term OTM call = covered call with less capital
- ✓ Requires 20-40% of the capital of a traditional covered call
- ✓ LEAPS delta should be 0.70-0.85 to closely track the stock
- ✓ Sell 30-45 DTE short calls and roll monthly for consistent income
- ✓ Biggest risk: sharp stock decline eroding LEAPS value
- ✓ Always ensure short call strike is above your LEAPS cost basis to avoid a loss on assignment
Related Options Strategies
Covered Call
The traditional version using 100 shares instead of a LEAPS call.
Diagonal Spread
The PMCC is a specific type of diagonal debit spread.
Calendar Spread
Similar time-based structure but with same strike prices.
Understanding related strategies helps you choose the best approach for your market outlook and risk tolerance. Each strategy has unique characteristics that make it suitable for different market conditions.
Your Learning Path
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