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)?
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.
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
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