How to use this calculator
- Enter the stock's current price and the number of contracts.
- For the long LEAPS call, enter its strike, the premium you paid, and its days to expiration.
- For the short call, enter its strike, the premium you collected, and its days to expiration.
- Read the result: net debit (your max risk), max profit, breakeven, return on debit, and annualized income yield.
What it tells you: whether a LEAPS-plus-short-call diagonal gives you covered-call income at a worthwhile return on the capital you put up - and flags setups that can't profit.
How this calculator works
A Poor Man's Covered Call has two legs: a long, deep-in-the-money LEAPS call that stands in for 100 shares, and a shorter-dated out-of-the-money call you sell against it for income. Because the LEAPS costs a fraction of 100 shares, the whole position ties up far less capital than a real covered call — hence "poor man's".
Enter both legs and the calculator returns the numbers that define the trade. The net debit — the LEAPS premium minus the credit from the short call, times 100 per contract — is what you pay to open, and also your maximum risk. Max profit is the spread width (short strike minus long strike) minus that net debit per share, reached when the stock sits at the short strike at the short call's expiration. The breakeven — the long strike plus the net debit per share — is also your effective cost basis: the price the stock must reach for the position to be worth what you paid.
It also shows the return on debit, the income yield (this cycle's short-call credit annualized against your capital — the recurring-income engine of the strategy), and the time value baked into the LEAPS, which is the decay you are financing. The payoff diagram uses the conservative model that values the LEAPS at intrinsic at the short expiration, so it reads like a bull call spread; the real curve usually sits a little higher because the LEAPS still has time value left.
PMCC vs a real covered call
The appeal is capital efficiency. A covered call on a $100 stock ties up $10,000 per contract and carries the stock all the way down to zero. The PMCC might control the same shares for a $2,000–3,000 LEAPS, and its loss is capped at that net debit. That smaller, defined risk is the headline benefit.
The costs: the LEAPS pays no dividends, it bleeds time value as it ages (you are renting exposure, not owning it), and a sharp rally far above the short strike can squeeze the diagonal because the short call's losses outrun the LEAPS's gains until you adjust. A PMCC suits a moderately bullish, range-aware view on a stock you do not need to own outright — not a buy-and-hold dividend position.
Worked example
A fixed, hypothetical illustration — not live market data.
A hypothetical stock trades at $100. You buy the $80 LEAPS call (about a year out) for $24 — $20 of that is intrinsic, $4 is time value. You sell the $110 call, 30 days out, for $1.50.
- Net debit / max risk: ($24 − $1.50) × 100 = $2,250 per contract.
- Spread width: $110 − $80 = $30.
- Max profit (estimate): ($30 − $22.50) × 100 = $750.
- Breakeven / cost basis: $80 + $22.50 = $102.50.
- Return on debit: $750 ÷ $2,250 ≈ 33%.
- Income yield: the $150 short-call credit on $2,250 of capital, annualized over 30 days, is about 81% — the rate at which repeated short calls pay back the debit (if you could repeat it).
Common mistakes
- Buying a LEAPS that isn't deep enough in the money. A low-delta long call does not track the stock, so it fails as a share substitute and bleeds time value fast.
- Selling a short strike inside your breakeven. If the short strike is below the long strike plus net debit, the position can't profit. The calculator flags this.
- Ignoring the rally risk. A fast move well above the short strike hurts a PMCC until you roll the short call up; the long call's gains lag the short call's losses in the short run.
- Forgetting the LEAPS expires too. You must close or roll the long call before its own expiration; it is not a permanent stock holding.
- Overpaying in time value. The "LEAPS time value paid" figure is decay you finance — keep it modest relative to the credits you expect to collect.
Frequently asked questions
What is a Poor Man's Covered Call?
A Poor Man's Covered Call (PMCC) is a diagonal call spread that imitates a covered call for a fraction of the capital. Instead of buying 100 shares, you buy one long-dated, deep-in-the-money LEAPS call as a stock substitute, then sell a shorter-dated out-of-the-money call against it to collect premium. It is a defined-risk, mildly bullish income strategy.
How is the max profit calculated, and why is it an estimate?
Max profit ≈ (short strike − long strike − net debit per share) × 100 per contract. It is reached when the stock sits at the short strike at the short call's expiration. It is an estimate because at that point the long LEAPS still holds some time value the simple formula ignores — so the realised best case is usually a little higher than the figure shown. This calculator uses the conservative version.
What is the breakeven, and is it the same as the effective cost basis?
Yes — for a PMCC they are the same number: long strike + net debit per share. That is the price the stock must reach for the position to be worth what you paid, and equivalently your all-in cost per share to control the stock through the LEAPS. Below it the position is underwater; above it (up to the short strike) it gains.
PMCC vs a real covered call — what's the trade-off?
A covered call ties up the full price of 100 shares and carries the stock's entire downside. A PMCC replaces the shares with a LEAPS call, so it costs far less capital and caps the downside at the net debit — but it pays no dividends, loses time value on the long call, and can be squeezed if the stock gaps far above the short strike.
Why does the LEAPS need to be deep in the money?
A deep-in-the-money LEAPS has a high delta (often 0.80+), so it tracks the stock closely — that is what makes it a sensible stock substitute. It also carries less time value relative to its price, so you finance less decay. A near- or out-of-the-money LEAPS behaves more like a cheap lottery ticket than like owning shares.
What happens if the short call finishes in the money?
If the stock is above the short strike at expiration, the short call is normally assigned through your broker’s exercise-by-exception process, and you owe 100 shares at the short strike. Your LEAPS can cover that, but the assignment does not act on it: you either exercise the LEAPS, which throws away its remaining time value, or sell it and buy the shares in the market, which can recover that time value when the prices work out after costs. Which route you take, and at what prices, is what decides the result — the max profit above is an intrinsic-only estimate, not a figure either route is guaranteed to reach. In practice most traders buy back or roll the short call before expiration to keep the LEAPS and sell another call. Watch ex-dividend dates, when early assignment is more likely.
What is the most I can lose on a PMCC?
The net debit you paid to open the position. The worst case is the stock falling below the long strike at the LEAPS expiration, leaving both calls worthless. That is why the strategy is defined-risk — unlike owning the shares, the loss is floored at what you put in.
When should I use a poor man's covered call?
When you want covered-call income but do not want to tie up the cash for 100 shares - you buy a deep in-the-money LEAPS call and sell shorter-dated calls against it. It suits a neutral-to-bullish view on a stock you would own. Skip it if you expect a sharp rally, since the short call caps you and you forgo dividends, and avoid illiquid names where a wide bid-ask on the long leg eats the edge.
Related tools and guides
Prefer to own the shares outright? Compare with the Covered Call Calculator. Want a simpler defined-risk bullish play? See the Bull Put Spread Calculator, or model the general two-strike, two-expiry case in the Diagonal Spread Calculator.
Check whether the calls you're selling are richly priced first with the IV Rank Calculator, and look up any term in the options glossary. Prefer owning the shares outright? Compare in Covered Call vs Poor Man's Covered Call. New to the strategy? Start with What is a poor man's covered call?
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The bottom line
A poor man's covered call replaces the shares with a deep in-the-money LEAPS; the cost to open is the whole risk, and maximum profit lands with the stock at the short strike.
Educational tool only. Nothing here is financial advice. A PMCC is defined-risk but can still lose its full net debit, drags on time decay, and can be squeezed by a sharp rally before you adjust. Size positions accordingly.