A poor man's covered call (PMCC) is a strategy where you buy a long-term call option (a LEAPS) instead of buying 100 shares of stock, then sell a shorter-term call against it to collect income. The LEAPS acts as a synthetic substitute for stock ownership at a fraction of the capital cost.
The name reflects the capital advantage: you get covered-call-like income without needing to buy the actual shares.
How Does a PMCC Work?
A standard covered call requires owning 100 shares. On a $200 stock, that is $20,000 of capital tied up per position. A PMCC replaces the stock with a deep in-the-money (ITM) LEAPS call option that moves almost like the stock but costs far less.
Structure:
- Buy a LEAPS call option with a low delta (typically 0.80 or higher), expiring 12–24 months out
- Sell a near-term out-of-the-money (OTM) call option against it, expiring 30–45 days out
The premium collected from the short call helps offset the cost of the LEAPS over time. If you repeat the short call sale each month, you gradually reduce the net cost of the LEAPS.
A Practical Example
- Stock XYZ is at $100
- Standard covered call requires $10,000 (100 shares at $100)
- PMCC alternative: buy a $70 strike LEAPS call (deep ITM, delta ~0.85) expiring in 18 months for $3,500
- Sell a $105 call expiring in 30 days for $2.00 ($200 premium)
- You collected $200 income while tying up $3,500 instead of $10,000
If you repeat this each month and the stock stays below $105, you gradually reduce the net cost of your LEAPS through collected premiums.
What Are the Risks of a PMCC?
The short call can exceed the long call's strike: If the stock surges above your LEAPS strike, the short call can become more costly than the value gained from the long LEAPS. This creates a net loss on the spread even though the underlying moved in your favor.
LEAPS can expire worthless: If the stock falls significantly and your LEAPS is no longer in the money near expiration, the long call loses most of its value. Unlike owning stock, which retains some value even if it drops, an out-of-the-money LEAPS at expiration is worth zero.
Time decay works against you on the LEAPS: While theta helps you on the short call (you want it to decay), theta hurts you on the long LEAPS (you paid for that time value). The net effect is usually slightly positive since LEAPS decay slowly, but it is not zero.
Assignment risk on the short call: If the stock rises above the short call's strike before expiration, you may be assigned. On a PMCC, you would exercise your LEAPS to fulfill the obligation — or buy back the short call.
PMCC vs. Standard Covered Call
| Factor | Standard Covered Call | PMCC |
|---|---|---|
| Capital required | Full stock cost (e.g., $10,000) | LEAPS cost (e.g., $3,500) |
| Dividends | Yes — you own the stock | No — LEAPS does not pay dividends |
| Downside protection | Premium only (stock retains value) | LEAPS can go to zero if stock drops far |
| Max loss scenario | Stock goes to zero (unlikely) | LEAPS expires worthless (if stock drops enough) |
| Voting rights | Yes | No |
PMCC vs. Iron Condor for Income
The PMCC is still a directional strategy — you need the stock to stay relatively flat or rise moderately. You have upside exposure through the LEAPS and downside exposure through the LEAPS losing value.
An iron condor is fully non-directional. You profit whether the market moves up, down, or sideways — as long as it stays within your defined range. There is no stock or LEAPS to lose value on a big drop.
| Factor | PMCC | Iron Condor |
|---|---|---|
| Directional exposure | Long (via LEAPS) | Neutral |
| Capital required | LEAPS cost (~$1,500–$5,000 typical) | Spread width × 100 (often under $1,000) |
| Income source | Short call only | Short call + short put |
| Max loss type | LEAPS losing value | Defined by spread width |
For traders who want pure income without directional exposure, iron condors are structurally simpler and require less capital per position.
What is a LEAPS options contract explains the LEAPS mechanics in more detail if you want to understand the building block of the PMCC.
How Tradematic Compares
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Frequently Asked Questions
How is a PMCC different from a diagonal spread? They are the same thing. A poor man's covered call is a diagonal spread — a long option at one expiration and strike, combined with a short option at a different (closer) expiration and strike. "PMCC" is the income-focused name for this structure.
Do I need a high options approval level for a PMCC? Yes. Buying LEAPS requires basic options approval. The full PMCC as a spread typically requires Level 2 or Level 3 approval, depending on your broker. The short call component is covered by the long LEAPS.
Can I lose more than I invested in a PMCC? No, as long as the short call is always covered by the long LEAPS. Your maximum loss is the net debit paid (cost of LEAPS minus premium received from short calls over time). The short call is limited by the long LEAPS above it.
How deep in the money should the LEAPS be? Most PMCC traders buy LEAPS at 0.80 delta or higher. This means the LEAPS moves closely with the stock — about $0.80 for every $1 move in the stock. Lower delta LEAPS are cheaper but move less like stock ownership.
What happens if the stock drops significantly in a PMCC? The LEAPS loses value. If the stock drops enough to push the LEAPS out of the money, you face significant paper losses on the LEAPS. The short calls you have been selling provided some income offset, but they do not fully protect against a major decline.
Trading involves risk and losses can occur. Past performance does not guarantee future results. Options trading is not suitable for all investors. Only allocate capital you are comfortable risking.
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