Poor man’s covered calls (PMCC) are essentially a way to do a covered call strategy using options only, instead of buying the stock. It involves buying a long-term in-the-money call (which acts like the stock) and selling short-term calls against it for income. The strategy mimics a covered call’s payoff with much less capital. It’s called “poor man’s” because it’s a more capital-efficient substitute for owning 100 shares and writing calls. In summary, a PMCC = a long call diagonal debit spread that replicates a covered call position.
Poor Man’s Covered Call (PMCC) is an advanced options strategy that replicates the payoff of a traditional covered call position by using options in place of owning the stock. In essence, a PMCC is a long call diagonal spread – you buy a long-term in-the-money call and sell a short-term out-of-the-money call on the same underlying. If you are still a beginner options trader, do conduct your due diligence and understand the risks fully before making any trading decision..
This options strategy mimics holding 100 shares and writing a call against them, but with a much lower capital requirement. The strategy gets its nickname “poor man’s” covered call because it allows you to generate income similar to a covered call with significantly less upfront money.
This strategy is best suited for neutral to moderately bullish traders, especially those with limited capital who still want to generate income or modest growth from a position.
What Is a Covered Call?
A covered call is a classic options strategy where an investor owns 100 shares of a stock and sells a call option against those shares. By writing a call, the investor collects an option premium upfront, which provides income and a small buffer against minor stock declines. In return, the seller gives the call buyer the right to purchase the shares at a specified strike price before expiration. If the stock’s price remains below the strike, the option expires worthless and the investor keeps both the shares and the premium. If the stock rises above the strike, the call will be exercised and the investor must sell their shares at the strike price.
Pros of a Covered Call
-
Income Generation: You can potentially earn reliable income from the call premiums.
-
Downside Cushion: The premium received offers a small buffer against minor declines. It’s not full protection, but it slightly reduces your effective loss if the stock dips.
-
Simple Strategy: It’s straightforward – often viewed as a conservative strategy for long-term stock holders to generate extra yield on their portfolio.
Cons of a Covered Call
-
Capped Upside: Your profit is limited to the strike price plus premium.
-
Large Downside Risk: You still face full downside exposure. A major stock drop can result in significant losses, with limited protection from the premium received.
-
Assignment Risk: If the short call is exercised (especially around dividends), you are required to sell your shares at the strike. To avoid this, you may need to roll the option, which adds complexity and requires active management.
In short, a covered call is an income strategy for stock owners who have a neutral view on the stock in the near term. They are willing to cap their short-term upside in exchange for premium income.
How Poor Man’s Covered Call Strategy Works
A Poor Man’s Covered Call uses two option legs to replicate a covered call position:
-
Long-Term ITM Call (Long Call): Buy a deep in-the-money call option with a far-out expiration (often 6+ months, even 1-2 years out, i.e. a LEAP contract). This long call acts as a substitute for owning the stock – because it’s deep ITM, its value moves almost dollar-for-dollar with the stock’s price (high delta close to 1). It gives you the upside exposure similar to 100 shares, but at a fraction of the cost.
-
Short-Term OTM Call (Short Call): Sell a short duration call option (often 1 month or shorter until expiration) with a strike price above the current stock price (out-of-the-money). This short call is analogous to the call you’d sell in a covered call strategy, generating income (premium).
Why it works: The deep ITM long call has high intrinsic value and behaves like the stock – if the stock rises, the long call’s value rises almost equivalently, and if the stock falls, the long call loses value similarly. Meanwhile, by continually selling short-term calls against it (and rolling them as they expire), you bring in a premium that finances part of that long call’s cost and compensates for its theta decay.
Still confused? Connect with 7-figure options trading mentors who have proven track records — inside our Options Trading Membership Program.
To summarize the structure side-by-side with a traditional covered call:
|
|
Traditional Covered Call |
Poor Man’s Covered Call (PMCC) |
|
Long Position |
Own the stock |
LEAP as a stock substitute |
|
Short Position |
1 short OTM call |
1 short OTM call |
|
Capital Required |
High – need to purchase shares upfront |
Low – pay premium for LEAP (often 80%+ cheaper than shares) |
|
Receives Dividends? |
Yes |
No |
|
Time Decay (Theta) |
No time decay on stock. |
Long calls lose value over time (negative theta). |
|
Upside Potential |
Capped: stock gains up to strike + premium received |
Capped: effectively gain up to (short strike – long strike) + premiums |
|
Downside Risk |
Possible Large Loss |
Limited to the net debit paid |
|
If Short Call Assigned |
Deliver 100 shares |
Use long call to deliver shares or otherwise close position |
As shown above, the payoff characteristics of a PMCC closely resemble those of a covered call. Both strategies profit if the underlying rises moderately (up to the short strike) or even if it stays flat (thanks to the premium), and both have a maximum profit that is limited.
How to Set Up a Poor Man’s Covered Call Step-by-Step
Setting up a PMCC involves selecting the right underlying and option strikes/expirations carefully. Below is a step-by-step guide:
Step One : Choose a Suitable Stock/ETF
Select an underlying stock that you have a neutral to moderately bullish outlook on for the near to medium term. Ideally, pick a stable, relatively predictable stock – something not prone to extreme volatility or wild price swings. Stocks with liquid options are preferred so that you can enter and exit positions more easily.
Step Two : Buy a Long-Term, Deep ITM Call a.k.a Your Stock Stand-in
Pick a long-term call option with a strike well below the current stock price to ensure its deep in-the-money. This type of option closely mimics stock movement while costing far less. Most of its value is intrinsic, meaning less wasted time value. It behaves like owning 100 shares, but your max loss is only the premium paid—making it a capital-efficient alternative.
Step Three : Sell a Short-Term, OTM Call a.k.a Your Income Engine
This is the leg that brings in income. Sell a call option that expires in a short term, with a strike above the current stock price. Shorter durations (like weekly options) decay faster, but need more management. Monthly calls are a balanced choice. Just make sure the short call expires well before your long call, so you can sell multiple short calls during the life of your long LEAP. More calls = more potential income.
Step Four : Execute the Trade
Once you're happy with the strikes and net debit, it’s go time. You can enter the PMCC as a single diagonal spread order (Buy 1 long call + Sell 1 short call) to lock in prices for both legs at once. Some broker platforms support this directly.
Prefer to "leg in"? Always buy the long call first, then sell the short call. Never sell a call without owning the stock or a long call—doing so creates a naked call, which carries unlimited risk and often breaches margin rules.
Use limit orders to avoid poor fills, especially since LEAP options can have wide bid-ask spreads. Avoid entering during volatile times when prices can jump between orders.
Once filled, you’ll hold a net debit position: your long call (asset) and short call (liability) are in place. You’re officially running a PMCC.
For more in-depth information about PMCC click here: “How to Manage a Poor Man’s Covered Call Position”
Risks of a Poor Man’s Covered Call
While PMCC can be a powerful strategy, it’s important to understand its risks and drawbacks:
Early Assignment Risk
If the short call is in-the-money (ITM), especially before a dividend date, it may be exercised early. Since you don’t own the stock, you’ll be assigned 100 short shares. The advantage is that our long call covers this risk. You can exercise the long call to deliver the shares and close both legs, likely realizing your max profit.
However, early assignment can happen at a bad time—before your long call has lost all extrinsic value. This could mean a smaller profit than expected. To avoid surprise assignments, monitor ITM short calls and roll or close them proactively, especially around dividends.
Time Decay (Theta Loss)
Stocks don’t expire, but options do. Your long LEAP call will slowly lose extrinsic value as time passes, especially if the stock moves sideways or drifts down. While the short call’s theta helps offset this, it usually won’t cancel it out completely unless the setup is advantageous.
If you’re not consistently selling short calls or the stock doesn’t trend upward, the long call’s decay may eat into profits. The clock is always ticking. Choose a deep ITM long call with minimal extrinsic value to reduce decay, and favor stable, trending stocks.
Liquidity and Execution Risk
LEAP options often have wide bid-ask spreads and lower volume. This makes it harder to enter/exit or roll the position, potentially increasing trading costs. Thinly traded LEAPs also mean slippage and poor fill prices.
Not all stocks offer suitable LEAPs, either. Stick to liquid, high-volume tickers with tight spreads, especially for the long call. Always use limit orders when possible to avoid overpaying.
Volatility and Vega Risk
PMCCs are sensitive to implied volatility (IV). Your long call (being far-dated) has high vega. A drop in IV can reduce its value, even if the stock price stays unchanged. Meanwhile, the short call benefits from falling IV, but usually not enough to offset losses on the long call.
For example, entering just before earnings (high IV) can be risky—if the stock doesn’t move but IV collapses, your long call loses value fast. It’s better to enter PMCCs when IV is low, and avoid holding them through high-volatility periods of time.
Opportunity Cost and Complexity
If you have sufficient capital, owning stock and using a traditional covered call may be simpler and more rewarding, especially if the stock pays dividends. PMCCs don’t earn dividends and are more complex to manage—they require understanding Greeks, managing expirations, and actively monitoring your position.
This added complexity can lead to mistakes (e.g., forgetting to roll a short call), especially for beginners. Make sure you have the time and experience to manage both legs effectively.
As a whole PMCCs combine stock-like exposure with the complexity of multi-leg option trades. Be aware of risks like early assignment, time decay, low liquidity, volatility shifts, and operational complexity. With proper setup and active management, you can mitigate these risks and decide if the strategy fits your goals and experience level.
Example of a Poor Man’s Covered Call Trade
Let’s break down what could happen after you enter a Poor Man’s Covered Call (PMCC). You bought a long-term $70 call for $28 and sold a short-term $100 call for $2. That means your total cost (net debit) is $26.
Now, let’s walk through a few possible scenarios over the course of the short call’s term of around 1 month to see how this works out:
Scenario 1: Stock maintains sideways around $98
-
The stock didn’t rise past your short call’s $100 strike.
-
Your short call expires worthless → you keep the $2 premium.
-
Your long $70 call gained some value as the stock went up slightly.
-
You’re up about $4 total this month.
Scenario 2: Stock rises to $105
-
Your short call gets exercised because the stock went above $100.
-
You use your long call to buy shares at $70 and “sell” them at $100.
-
That’s a $30 gain minus your $26 cost → $4 profit.
Still the max profit, even though the stock went past $100 – extra gains go to the buyer of your short call.
Scenario 3: Stock drops to $85
-
Short call expires worthless → you keep the $2 premium.
-
Long calls lose value, now worth less.
-
Your position shows a paper loss (maybe -$6), but the long call still has time.
You can keep going by selling another call next month and wait for the stock to recover.
Scenario 4: Stock crashes to $65
-
Long calls are now out-of-the-money and worth very little.
-
You already collected $2, and maybe your long call is worth $3 now.
-
You’re facing a loss of around $21–$26.
You can either hold on and hope for a recovery or close the trade and limit your loss. The good news? You risked far less than buying 100 shares outright.
Scenario 5: Rinse and repeat for many months
-
Stock stays in a sideway range of ($90–$105) over several months.
-
You keep selling short calls each month and collecting premiums.
-
Over 12 months, you collect ~$14 in total premiums.
-
Your long call is worth ~$30 at expiration.
Final result: You turned a $28 investment into $44 (long call + premiums) → $16 profit, or around 57% return.
Poor Man’s Covered Call Calculator and Cheat Sheet
To effectively plan and evaluate a Poor Man’s Covered Call position, you can use the following formulas. These assume you are dealing with one options contract (100 shares equivalent) and working on a per-share basis for simplicity:
Net Debit
This is the initial cost of the strategy (money out of pocket). It’s the difference between what you pay for the long call and what you receive for the short call.
Net Debit = Long Call Premium – Short Call Premium
Max Profit
This is the maximum possible gain on the trade. The max profit is essentially the intrinsic value spread minus what you paid. That intrinsic spread is (Short strike – Long strike) and your net payment was Net Debit.
Max Profit = (Short Strike – Long Strike) – Net Debit
Breakeven Point
This is the stock price at which you neither profit nor lose on the overall position by the short call’s expiration. At breakeven point, the intrinsic value of the long call equals the net debit.
Breakeven = Long Call Strike + Net Debit
Max Loss
This is the worst-case scenario and is generally limited to the net debit you paid.
Max Loss = Net Debit
In real trading, use these formulas to evaluate each prospective trade:
-
Is the upside worth it (max profit vs net debit)?
-
Is the breakeven comfortable relative to your outlook?
-
Is the max loss within your risk tolerance?
If the numbers don’t look good, adjust strikes or pick a different underlying.
Closing Remark about PMCC
PMCC offers a powerful way to mimic a covered call without tying up large amounts of capitals. It comes with lower risk, flexible income generation and a clear risk reward profile. But like all options trading tactics, success comes from understanding the mechanics, active management and staying disciplined. Fast-track your trading journey by learning from our 7-figure mentors. Receive hands-on trading guidance and active community support in our Options Trading Program.
submit your comment