Poor Man's Covered Call: LEAPS Strategy Explained

What Is a Poor Man's Covered Call?

A poor man's covered call (PMCC) replaces the 100 shares of stock with a deep in-the-money LEAPS (Long-term Equity Anticipation Securities) call option. You then sell short-term covered calls against the LEAPS, just as you would against shares.

Why "poor man's"? Because instead of needing $23,000 to buy 100 shares of Apple, you might spend $5,000-$8,000 on a LEAPS call — reducing your capital requirement by 65-80% while generating similar income.

The strategy is technically a diagonal call spread: long a far-dated deep ITM call, short a near-dated OTM call.

How to Set Up a PMCC

Step 1: Buy a LEAPS call option • Expiration: 6-12+ months out (ideally 9-18 months) • Delta: 0.70-0.85 (deep in the money) • This LEAPS acts as your "stock replacement"

Step 2: Sell a short-term call against it • Expiration: 30-45 days out • Delta: 0.15-0.30 (out of the money) • Strike must be above your LEAPS strike for maximum profit

Example on a $200 stock: • Buy 12-month $160 call for $50 ($5,000 cost) • Sell 30-day $210 call for $3 ($300 income) • Capital deployed: $5,000 vs $20,000 for shares • Monthly income rate: $300/$5,000 = 6% per month

PMCC vs Traditional Covered Call

Advantages of PMCC: • 65-80% less capital required • Higher return on capital deployed • Built-in leverage amplifies returns • Can run the strategy on expensive stocks

Disadvantages of PMCC: • LEAPS has time decay working against you • If the stock drops significantly, LEAPS loses value faster than shares • More complex to manage and roll • No dividends (you don't own shares) • Wider bid-ask spreads on LEAPS

The PMCC is best for investors who want covered call income but lack the capital for 100 shares of expensive stocks like AMZN, GOOGL, or NVDA.

Risk Management for PMCC

Key risks and how to manage them:

1. Max loss: Your LEAPS premium. If the stock crashes, your LEAPS could become worthless. Mitigate by choosing high-quality stocks.

2. Short call goes ITM: If your short call is assigned, you exercise your LEAPS to deliver shares. The spread between strikes is your profit/loss.

3. LEAPS time decay: Your LEAPS loses value over time. The income from short calls should exceed this decay. Choose LEAPS with 9+ months remaining.

4. Volatility crush: If IV drops, your LEAPS loses extrinsic value. Deep ITM LEAPS (0.80+ delta) have less extrinsic value, reducing this risk.

Rule of thumb: Close the entire position if your LEAPS falls below 0.60 delta, as it's no longer an effective stock replacement.