Poor Man's Covered Call (PMCC) Explained
A PMCC replaces the 100 shares of a covered call with a deep-in-the-money LEAPS call, then sells short-dated calls against it for a fraction of the capital.
What it is
A poor man's covered call is a diagonal spread that mimics a covered call at much lower cost. Instead of buying 100 shares, you buy a deep-in-the-money long-dated call, a LEAPS, which behaves like the stock because its delta is close to one. You then sell a short-dated out-of-the-money call against it, collecting premium just as a covered call does. The LEAPS ties up far less capital than the shares would, so the yield on capital can be higher, at the cost of a defined expiry and no dividends. It is a capital-efficient way to run a covered-call income strategy on a bullish name.
Payoff at expiration
When to use it
Use a PMCC when you are bullish on a name over the life of the LEAPS but want covered-call income without tying up the full cost of the shares. It suits accounts that want the covered-call payoff with less capital, and it works best when the LEAPS is bought deep enough in-the-money that its delta is high and its extrinsic value low, so it tracks the stock closely. Sell the short call at a strike above the LEAPS strike so the diagonal has positive width, and manage the short call like any covered call, rolling it as it decays or is tested.
Greeks profile
| Delta | Net positive, driven by the high-delta LEAPS and reduced by the short call, so it behaves like a partial long-stock position. |
| Gamma | Short gamma from the near-dated short call, which dominates the gamma profile as that call approaches expiry. |
| Theta | The short call decays in your favour; the LEAPS decays against you slowly, so net theta is usually positive if the short call is chosen well. |
| Vega | Net long vega, since the long-dated LEAPS carries far more vega than the short call you sell against it. |
Max profit, max loss & break-evens
Max profit ≈ (short call strike − LEAPS strike) − net debit, when the stock sits near the short strike at the short call's expiry. Max loss ≈ the net debit paid, approached if the stock falls well below the LEAPS strike. Break-even ≈ LEAPS strike + net debit at the short call's expiration (approximate, since the LEAPS retains value).
Concrete example
A stock trades at 100. Instead of buying 100 shares for 10,000, you buy the one-year 85 LEAPS call for 18, delta about 0.85, and sell the one-month 110 call for 1. Your outlay is roughly 1,700 net versus 10,000 for the shares. Each month you sell another call against the LEAPS, collecting premium on a fraction of the capital. If the stock grinds up toward 110 you capture both the LEAPS gain and the premiums; if it stalls you keep collecting call premium.
Risks & management
The LEAPS has an expiry and pays no dividend, unlike the stock, so a long sideways or falling market bleeds its extrinsic value and can lose most of the debit. The short call caps upside just as in a covered call, and a sharp rally can force you to roll the short call up at a loss to avoid assignment above the LEAPS strike. The main discipline is buying the LEAPS deep enough in-the-money that it tracks the stock, managing the short call actively, and sizing for the fact that, unlike shares, the position can expire worthless if the thesis is wrong for long enough.
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