Poor Man’s Covered Call vs Traditional Covered Call

Both covered calls and Poor Man’s Covered Calls aim to generate income from a bullish or neutral stock outlook—but they approach it in very different ways. Whether you’re working with a smaller account or want more capital efficiency, the Poor Man’s Covered Call (PMCC) presents a capital efficient alternative to the traditional covered call. In this article, we break down how they stack up across key areas: capital needed, profit potential, breakeven points, risk, and long-term flexibility.

Capital Efficiency: How Poor Man’s Covered Calls Differs from Covered Calls

This is where Poor Man’s Covered Call(PMCC) really stands out.

• Traditional Covered Call: You must purchase 100 shares of stock. For a $100 stock, that’s $10,000.
  
  
• Poor Man’s Covered Call: Instead of stock, you buy a long-term in-the-money (ITM) call option (typically a LEAP).
  
  

This means a PMCC only requires 60% to 90% less capital than a covered call. That makes it more accessible for traders with smaller accounts or for those who want to keep capital available for other positions. Keep in mind, the amount you pay for the LEAP is still at risk, just like stock in a traditional covered call.

Poor Man’s Covered Calls vs Covered Calls Profit Potential

Both strategies have capped upside, but they cap profits in slightly different ways.

• Covered Call: You profit from stock appreciation up to the short call’s strike, plus the premium received. 
• PMCC: Your long call gains intrinsic value as the stock rises toward the short call’s strike. Add in the premium received, and that’s your potential profit.

Here’s how it looks in formula format:

PMCC Max Profit ≈ (Short Call Strike – Long Call Strike – Net Debit Paid)

That’s similar to the covered call’s (stock gain + premium). What’s different is capital efficiency. A PMCC might deliver the same per-share profit as a covered call, but with less capital invested, your return on investment can be significantly higher.

Example:

• Covered Call earns $10 on $100 stock = 10% return

• PMCC earns $10 on $30 LEAP = ~33% return

This leverage cuts both ways, of course. Percentage losses can be higher too if the trade turns against you.

Breakeven Points for PMCC vs Covered Calls

Understanding where you break even is critical.

• Covered Call Breakeven: Stock price – premium received
  (e.g., Bought stock at $100, received $2 premium → breakeven is $98)
  
  
• PMCC Breakeven: Long call strike + net debit paid
  (e.g., Bought $70 call, net debit was $26 → breakeven stock price is $96)
  
  

At breakeven, the long call’s intrinsic value equals your cost. Above that, you’re in profit. Below, you’re in loss. Since PMCCs involve a long call with more time left, breakeven can move depending on whether you hold the call or roll it.

Risk Profile and Max Loss for PMCC vs Covered Calls

All trading strategies carry risk—but the size and structure of that risk differs.

• Covered Call Max Loss
  If the stock drops to zero, your loss is the stock’s full value minus any premium collected.

 ($100 stock – $2 premium) × 100 shares = $9,800 max loss

• PMCC Max Loss:
  Your risk is the net debit paid—usually much smaller.
  
  (e.g., $2,600 total cost → that’s your max potential loss)
  
  
  

In both cases, you could lose 100% of what you invested, but the absolute dollar loss is smaller with a PMCC due to lower capital at stake.

Flexibility and Time Horizon

This is where traditional covered calls hold an edge.

• Stock Ownership (Covered Call):
  You can hold indefinitely, collect dividends, and sell calls continuously. If the stock drops, you can ride it out.
  
  
• LEAP Ownership (PMCC):
  LEAPs will expire. You must manage your long call, potentially roll it, and be more proactive if the stock drops below your long call’s strike.

• Dividends: Covered calls earn them; PMCCs don’t.

• Execution Simplicity: Covered calls are easier to execute in basic brokerage accounts. PMCCs typically require higher-level approval (since they’re technically diagonal spreads).
  
  

So while the PMCC offers capital efficiency, it also demands more hands-on management. A traditional covered call is simpler to maintain over longer timeframes.

Table of Considerations between PMCC and Covered Calls

Both the traditional covered call and the Poor Man’s Covered Call offer paths to income generation and modest capital growth—especially in range-bound or gently rising markets. But they’re built for different situations:

Each strategy has its place in a well-rounded options playbook. The key is to choose the right tool for your objective, risk tolerance, and account size.

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Final Thoughts about both Covered Calls Strategies

Covered calls and Poor Man’s Covered Calls (PMCC) aim to achieve similar outcomes but cater to different trader profiles. For traders who prefer defined risk and lower upfront capital, PMCC can be a powerful alternative—provided they’re comfortable with managing the extra moving parts. Ultimately, the best fit depends on your capital, timeline, and comfort level with options mechanics.

FAQs

Is PMCC better than Covered Calls? 

Both strategies aim to generate income but suit different traders. A Poor Man’s Covered Call (PMCC) offers similar upside with far less capital, making it a more efficient choice for smaller accounts or those who want to stay flexible. However, it comes with added complexity and requires active management of the option legs.

Traditional covered calls are simpler, easier to set up in most brokerage accounts, and can be ideal if you already own the stock and want to generate steady premiums. The right strategy depends on your capital, experience, and time horizon.

What are the risks of a covered call? 

The main risk is that your downside is still fully exposed. If the stock falls significantly, the premium collected from selling the call will barely cushion the losses. On the other hand, your upside is capped at the short call’s strike price. That means if the stock rallies strongly, you miss out on potential gains. If the stock goes above the strike, you may be forced to sell your shares. This could disrupt long-term plans, especially if you weren’t ready to part with the stock.

Do you need 100 shares to sell covered calls?

Yes, to run a traditional covered call, you must own at least 100 shares of the stock per contract sold. If you don’t own the shares and still sell a call, that’s considered a naked call, which is much riskier and generally only allowed with high-level margin approval.

For those who don’t want to commit that much capital, a PMCC uses a long call option (LEAP) as a stock substitute, making it a more capital-efficient alternative.