What is a poor man's covered call?

Updated 6 June 2026 · by Theo Chen

A poor man's covered call (PMCC) is a diagonal call spread that mimics a covered call without owning the stock. You buy a long-dated, deep-in-the-money LEAPS call to stand in for 100 shares, then sell shorter-dated out-of-the-money calls against it for premium — capturing most of a covered call's income for a fraction of the capital.

Want to see whether a specific PMCC pencils out? Enter the LEAPS, the short call and the premiums and the calculator returns the net debit, breakeven, capital saved versus shares, and the payoff.

Open the Poor Man's Covered Call Calculator →

How does a poor man's covered call work?

The position has two legs on the same stock but different expirations — a diagonal:

  • The long leg: a deep-in-the-money LEAPS call, usually with a delta of 0.80 or more and 6–12+ months to run. Because its delta is high, it gains and loses roughly like 100 shares — the cheaper stand-in for stock.
  • The short leg: an out-of-the-money call expiring in a few weeks, sold for premium. You repeat this sale cycle after cycle, the same way a covered call seller writes calls against shares.

The premium you collect from the short call lowers your cost basis in the LEAPS over time, while the LEAPS does the work of tracking the stock.

Why "poor man's" — the capital saved

A traditional covered call ties up the cost of 100 shares. At $100 a share that is $10,000. The LEAPS that stands in for those shares might cost $2,000–$2,500 — so you run a covered-call-style income trade with roughly a quarter of the capital. That leverage is the appeal, and also the catch: a contract is not stock, it expires, and it pays no dividends.

The payoff and the risks

  • Best case: the stock drifts up toward — but not far past — the short call strike. The short call expires for full profit and the LEAPS has gained value.
  • Capped upside: above the short call strike your gains are limited, just as a covered call caps upside at the call you sold.
  • Max loss: the net debit you paid (LEAPS cost minus premiums collected). A severe drop in the stock erodes the LEAPS, and that debit is the most the position can lose.

A worked example

A stock trades at $100. You buy the 12-month $80 call for $24 ($2,400) — deep in the money, delta about 0.85. You then sell a 30-day $110 call for $1.20 ($120). Your net debit is $2,280, versus $10,000 to buy the shares. If the stock sits or rises gently, the short call decays and you keep the $120; next month you sell another call. If it rockets past $110, your upside is capped near that strike. If it collapses, the most you can lose is the $2,280 you put in.

Poor man's covered call payoff at expiration

Buy the deep-in-the-money $80 LEAP call (green) and sell the $110 call (red) for a $2,280 net debit. Upside is capped near $110 (about $720); the most you can lose is the debit; breakeven $102.80. The LEAP is shown at its intrinsic value at the short call's expiration.

Max profit +$720 Max loss -$2280 $0 Break-even $102.80 BUY $80 CALL SELL $110 CALL $80$110 Now $100 Underlying price at expiration Profit / Loss (per contract)

The bottom line

A poor man's covered call mimics a covered call for roughly a quarter of the capital by using a deep-in-the-money LEAPS call instead of 100 shares - more leverage per dollar, but the long call expires, pays no dividends, and the net debit is your full risk.

Frequently asked questions

What is a poor man's covered call?

A poor man's covered call (PMCC) is a diagonal call spread that mimics a covered call without owning the stock. You buy a long-dated, deep-in-the-money call (a LEAPS) to stand in for 100 shares, then sell a shorter-dated out-of-the-money call against it to collect premium. It captures most of a covered call's income for a fraction of the capital.

Why is it called a poor man's covered call?

Because it reaches the same goal — selling calls for income against a long position — for far less money. A real covered call needs 100 shares, which might cost $10,000. The LEAPS that stands in for those shares might cost $2,000–$2,500, so you control similar exposure with roughly a quarter of the capital. The trade-off is that you own a contract, not the shares.

What LEAPS should you buy for a PMCC?

Most traders use a deep-in-the-money LEAPS with a delta around 0.80 or higher and at least 6–12 months to expiration. A high delta makes the long call track the stock closely (so it behaves like shares), and the long runway means slow time decay on the leg you are holding. The deeper in the money, the more it acts like stock and the less time value you pay.

What are the risks of a poor man's covered call?

Three main ones. A sharp drop in the stock hurts the LEAPS, and your total risk is the net debit you paid. A sharp rally can be capped by the short call, and if it is breached you may need to roll or close to avoid assignment problems against a long call rather than shares. And unlike owning shares, you collect no dividends and the LEAPS still loses some time value over its life.

Is a PMCC better than a covered call?

It depends on what you value. A PMCC is more capital-efficient and gives more leverage per dollar, which suits smaller accounts. A covered call is simpler, pays dividends, has no expiration on the long leg and fewer moving parts. Many traders use the PMCC when capital is tight and switch to a true covered call once they can own the shares outright.

Related questions

Related tools and guides

Run the numbers in the Poor Man's Covered Call Calculator, compare it with owning the shares in the Covered Call Calculator, and read the head-to-head in Covered Call vs Poor Man's Covered Call. The LEAPS leg is a stock substitute — LEAPS vs Shares weighs it against owning the stock. Map the diagonal in the Payoff Diagram Builder.

Educational explainer only — not financial advice. Examples are illustrative and exclude commissions, early assignment and dividends. Confirm the mechanics and size positions to your own risk tolerance.