The covered call is often hailed as a conservative income-generating strategy. You own 100 shares of a stock, you write (sell) a call option against them, and in doing so, you generate income from the premium , all while holding on to your underlying shares. It's the investor’s version of collecting rent.
But what if owning those 100 shares isn’t financially feasible? A $100 stock requires a $10,000 investment per covered call contract. That price tag alone shuts many investors out of the strategy. Fortunately, there’s a capital-efficient alternative that achieves the same payoff structure without needing to own the shares outright. This is where LEAPS enter the scene.
Writing covered calls on LEAPS, also known in trader circles as a Poor Man’s Covered Call (PMCC), offers a compelling alternative. In this article, we’ll explore what LEAPS are, how they work in this strategy, and what trade-offs investors should be aware of when swapping shares for long-dated call options.
What Are LEAPS and Why They Matter
LEAPS, or Long-Term Equity Anticipation Securities, are simply long-dated options typically with expiration dates stretching 9 months to 3 years out. Just like shorter-term options, they give the buyer the right (not the obligation) to purchase or sell an underlying asset at a specified price.
But what makes LEAPS particularly special is their role as a leveraged substitute for stock ownership. If you purchase a deep in-the-money LEAP call with a high delta (say, 0.80 to 0.95), you’re essentially buying a position that behaves much like the stock itself at a cheaper price.
This concept is key. The LEAP becomes your “stock stand-in.” It doesn’t entitle you to dividends. You don’t get shareholder voting rights. But it mirrors price movements with enough accuracy to function as the base for an income-generating call strategy. It’s capital-efficient, defined-risk, and incredibly versatile for retail investors managing smaller portfolios.
Can I just buy LEAPS?
LEAPS aren’t only useful in income strategies. Some investors simply buy them outright as a leveraged bet on a stock they believe in. Instead of purchasing $10,000 worth of shares, they might buy a LEAP for $2,000 or $3,000, giving them equivalent exposure. But leverage cuts both ways. If the stock drops 10%, your LEAP might fall 20–30%, depending on how far in the money it was. That’s the trade-off: less capital, more torque.
The Role of Delta and Premiums
To understand why this works, it helps to grasp delta, one of the “Greeks” in options trading. Delta measures how much an option's price moves relative to the stock. A delta of 0.85 means your LEAP gains 85 cents for every $1 the stock gains.
The higher the delta, the more your LEAP behaves like stock. This is why most traders using this strategy aim for LEAPs with deltas between 0.75 and 0.90. It provides the necessary coverage when selling short calls while still offering downside protection (since you never lose more than the premium paid).
You’ll also need to get familiar with theta, the rate at which your LEAP loses value over time. Although LEAPS are less sensitive to theta decay than shorter-dated options, they still lose value as expiration nears.
How Writing Covered Calls on LEAPS Works
Let’s walk through the basic mechanics.
Instead of buying 100 shares of Stock XYZ at $100 per share (a $10,000 investment), you buy a LEAP call with a $60 strike price that expires in 12 months. Let’s assume this option costs $45 per share, or $4,500 total. With a delta of 0.85, it’ll track about 85% of the stock’s price movement. You have spent $4,500 instead of $10,000.
Now, with that long LEAP in place, you sell a 30-day call option at a $105 strike just like you would in a traditional covered call. This short call brings in, say, $150 in premium. Congratulations, you’ve created an income-generating position without buying any stock.
This strategy works similarly to a traditional covered call: you want the underlying to go up, but not too much. If the stock stays below $105, you pocket the full premium and can rinse and repeat. If the stock rises above $105, the short call gets exercised but your long LEAP protects you, allowing you to buy the stock at $60 and sell at $105.
The beauty lies in the structure. Your risk is limited to what you paid for the LEAP. Your reward is capped by the short call just like in a real covered call. But you’re achieving all this with a smaller capital outlay.
Final Thoughts
Writing covered calls on LEAPS gives investors access to a powerful toolkit. The ability to create stock-like income without owning the stock. It's capital-efficient, defined-risk, and versatile and when used wisely, it can compound small accounts with the steadiness of a rental property paying monthly rent.
But like all powerful tools, it demands respect. If you're just getting started with options, master the basics first. Learn how options move. Understand your Greeks. Practice in paper accounts if necessary. Then, when you’re ready, you can explore strategies like this — where leverage, patience, and income intersect.
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