A poor man’s covered call, or PMCC, is a way to run a covered-call-style income strategy without tying up the thousands of dollars it takes to buy 100 real shares. Instead of owning the stock, you buy one deep in-the-money, long-dated call option to act as a stock substitute, then you sell shorter-dated calls against it to collect premium. The technical name for this structure is a diagonal call spread.
The appeal is capital efficiency. A single deep in-the-money LEAPS call can cost a fraction of what 100 shares would, so a trader with a smaller account can practice the same sell-premium rhythm. That efficiency comes with its own set of trade-offs, though, and a PMCC is not simply a cheaper covered call with no strings attached. This guide walks through the mechanics, how to choose each leg, the risks that genuinely differ from a real covered call, and a side-by-side comparison so you can decide whether it fits how you actually trade. This is education, not advice, results vary, and every dollar figure here is an illustrative example, not a live price or a promised outcome.
This article is education only, not advice. Options involve risk and can lose money. Always do your own research.
⏱️ The 60-second version
- A PMCC replaces the 100 shares in a covered call with one deep in-the-money LEAPS call, so you control similar upside for far less cash.
- It is a diagonal call spread: a long-dated call you buy plus a shorter-dated call you sell against it.
- Target a long LEAPS that is deep in the money with a delta around 0.80 and an expiration 6 to 12 or more months out, so it tracks the stock closely.
- Sell a short call roughly 30 to 45 days out and out of the money, then repeat the sale as it expires or you close it.
- Rule of thumb: keep the short call’s strike above your total cost in the long call, so a move up to that strike cannot force a guaranteed loss on the spread.
- Unlike a real covered call, you do not own shares, so you collect no dividends and your long call still bleeds time value.
- A sharp gap up can cap your gains awkwardly, the short call can be assigned early, and your long call can still lose its full premium if the stock falls far enough.
What a poor man’s covered call actually is
Start with the picture of a normal covered call. You own 100 shares of a stock, and you sell one call option against those shares to collect premium. If the stock stays flat or drifts up modestly, you keep the premium and the shares. If it rises past the strike, your shares can be called away at that strike and your upside is capped. The shares are the collateral that lets you sell the call.
A PMCC swaps out those 100 shares for a stand-in. Rather than putting up the full cost of the stock, you buy one deep in-the-money call option with a long expiration, often a LEAPS (Long-Term Equity Anticipation Security), meaning a listed option that expires far in the future. Because it is deep in the money and long-dated, it tends to move a lot like the stock itself, gaining and losing value close to dollar-for-dollar with the underlying, though not perfectly. That long call becomes your synthetic stock position.
Then, exactly as in a covered call, you sell a shorter-dated call against it and collect premium. The formal name for a long option in one expiration paired with a short option in a different expiration is a diagonal spread, so a PMCC is really a long diagonal call spread. The nickname stuck because it lets a trader mimic a covered call on a much smaller budget, but the mechanics and risks are not identical, which is why it is only a nickname.
Why traders use it: capital efficiency
The whole point is the cash you free up. Suppose a stock trades near 100 dollars. Buying 100 shares would cost about 10,000 dollars. A deep in-the-money LEAPS call on that same stock might cost, as an illustrative example only, somewhere around 2,000 to 2,500 dollars. In that example you would be controlling a similar amount of directional exposure for roughly a quarter of the capital. Real prices depend on the stock, the strike, and market conditions, so treat these numbers as a teaching example, not a quote.
That smaller outlay does two things. It lets traders with modest accounts run a premium-selling strategy they otherwise could not afford, and it can raise the percentage return on the capital actually committed, because the income from the short call is measured against a smaller base. Efficiency cuts both ways, though. The same leverage that lifts percentage gains also magnifies percentage losses, and a wrong-way move hurts more in relative terms than it would if you simply owned shares outright. There is no guaranteed return here, and you can lose money.
Think of it as renting exposure rather than owning it. You get a defined, limited dollar amount of capital at risk, which some traders prefer, but you give up the permanence and simplicity of holding the actual stock. Neither version is universally better. They suit different account sizes, goals, and tolerances.
| Feature | Poor man’s covered call (PMCC) | Traditional covered call |
|---|---|---|
| Capital required | Lower, roughly the cost of one deep ITM LEAPS call | Higher, the full cost of 100 shares |
| What you hold | A long-dated deep ITM call as a stock substitute | 100 real shares of the stock |
| Dividends | None, you do not own the shares | Yes, you receive the stock’s dividends |
| Long leg time decay | Yes, the LEAPS loses extrinsic value over time | No, shares do not expire or decay |
| Max risk | Limited to the premium paid for the long call | Large, the stock can fall toward zero |
| Expiration to manage | Yes, the long call must be rolled or closed before it expires | No, shares can be held indefinitely |
| Best for | Smaller accounts prioritizing capital efficiency | Investors who want to own the stock long term |
How to choose the long LEAPS call
Go deep in the money and long-dated. The job of the long call is to behave like stock, and it does that best when it has a high delta. Delta estimates how much the option’s price moves for a one-dollar move in the underlying, so a delta near 0.80 means the LEAPS is expected to capture roughly 80 cents of every dollar the stock gains, all else equal. Many PMCC traders look for a long call with a delta around 0.80 or higher, which pushes you well into in-the-money strikes.
Give it plenty of time. An expiration 6 to 12 months out is a common floor, and many traders go further, out to a year or more, when suitable LEAPS are listed. Longer-dated options tend to decay more slowly on a day-to-day basis, so a distant expiration slows the fastest time decay and gives your thesis room to play out. You can always sell and roll the long call later if you want to keep the position alive, though rolling has its own costs.
Understand what you are paying for. A deep in-the-money LEAPS still carries some time value, called extrinsic value, on top of its intrinsic value. That extrinsic portion is the piece that erodes over time. The deeper in the money you go, the smaller that extrinsic slice tends to be as a share of the price, which is generally what you want, but it also means committing more capital. Choosing the strike is a balance between tracking the stock tightly and keeping the cost efficient.
How to choose the short call you sell
Keep the short call short-dated and out of the money. A window of about 30 to 45 days to expiration is popular because time decay, which works in your favor as the seller, tends to accelerate in that range for the option you sold. Selling an out-of-the-money strike above the current price leaves room for the stock to rise while you still collect premium, and it lowers the chance of assignment if the stock stays calm.
Now the rule that keeps a PMCC disciplined: mind your strike relative to your cost. Try to keep the short call’s strike above the total cost basis of your long call, calculated as the long call’s strike plus the premium you paid for it. If you break that rule and the stock jumps to the short strike, the spread can be worth less than what you paid for the long call, which can lock in a loss even when the stock rose. Keeping the short strike above that break-even preserves the ability to profit if the stock climbs to or through it. Note this rule is about the spread width, it does not protect you if the stock falls.
After you sell the short call, you manage it like any covered call. If it expires worthless, you keep the full premium and can sell another. If the stock rises toward the strike, you can buy the short call back and roll it up or out to a later date, sometimes for a net credit, to reduce assignment risk and reset the position. Repeating this sale over time is where the ongoing income can come from, though there is no guarantee each cycle is profitable.
The risks that differ from a real covered call
Your long call decays and can lose value if the stock falls. With real shares, a stock that drifts lower simply sits in your account and can recover over years while you keep collecting dividends and selling calls. A LEAPS call has an expiration. It loses extrinsic value as time passes even if the stock does nothing, and a meaningful drop in the underlying can cut its value sharply. Your maximum loss on the long leg is the full premium you paid for it, and a large drop by expiration can wipe out most or all of that premium.
A sharp gap up can cap you at an awkward spot. If the stock spikes well above your short strike, your short call goes deep in the money and your upside on the spread is capped, while your long call also gains but the short call offsets much of that. You can still be profitable, but a violent move can pin your profit below what a shareholder would have made, and rolling out of a deep in-the-money short call can get expensive or difficult.
Assignment and early exercise are live risks. With American-style options, the short call can be assigned any time it is in the money, and early-assignment risk rises when it is deep in the money or right before an ex-dividend date, when call holders may exercise to capture the dividend. And here is the dividend catch that surprises people: because you hold a call and not the shares, you do not receive the stock’s dividends at all. On a dividend-paying name, that lost income is a genuine cost of running a PMCC instead of a traditional covered call.
PMCC versus traditional covered call, in plain terms
Both strategies sell calls to generate income, and both cap your upside in exchange for premium. The difference is what backs the short call. A covered call is backed by 100 real shares you own outright. A PMCC is backed by a long LEAPS call standing in for those shares. That single swap changes the capital required, the risk profile, and what you collect along the way.
Choose the covered call when you want simplicity and staying power. You own the stock, you get the dividends, there is no expiration on your long leg, and a downturn can be waited out for as long as you like. It ties up far more cash, and the worst case is the stock falling toward zero, but the mechanics are straightforward and forgiving. It suits investors who genuinely want to hold the underlying.
Choose the PMCC when capital efficiency matters most and you accept more moving parts. It frees up cash, caps your maximum loss at the price of the long call, and can produce a higher return on the capital committed. In exchange you take on time decay on the long leg, no dividends, an expiration to manage, and the discipline of keeping your short strike above your cost basis. Neither is a sure thing, and the table below lays the two side by side.
The Covered Call Series
Run the numbers yourself
- Covered Call Calculator, static yield, if-called return, annualized, breakeven, and assignment odds
- Options Profit Calculator, model a multi-leg position like the diagonal
Put it into practice
Free calculators and plain-English guides for covered calls, cash-secured puts, and the wheel.
Frequently Asked Questions
Is a poor man’s covered call actually a covered call?
Not in the strict sense. A true covered call is backed by 100 shares you own, so the call you sell is fully covered by stock. A PMCC is backed by a long-dated deep in-the-money call that acts as a stock substitute, which makes the real structure a diagonal call spread. The nickname reflects that it behaves similarly for a lower cost, not that it is mechanically identical. The differences, like time decay on the long leg and no dividends, are exactly why the label is a nickname.
Why does the short call’s strike need to be above my long call’s cost?
Because it protects you from locking in a loss on a move up. Your cost basis on the long call is its strike plus the premium you paid. If you sell a short call with a strike below that number and the stock climbs to the short strike, the spread can be worth less than what you paid, which can guarantee a loss even though the stock rose. Keeping the short strike above your break-even means that if the stock rises to that level, the spread can still be profitable rather than trapped. This rule is about the upside, it does not shield you from the stock falling.
What happens if my short call gets assigned?
If the short call is assigned, you are obligated to deliver 100 shares at the strike. Since you do not own shares in a PMCC, you typically exercise or sell part of your long call to cover the obligation, or you close the whole position, and your broker may handle part of this automatically. It is manageable but not free, and early assignment is more likely when the short call is deep in the money or right before an ex-dividend date. Many traders roll the short call up or out before it gets that deep to reduce the chance of it happening.
Do I lose money on the LEAPS if the stock just sits still?
You lose a little to time decay, yes. A deep in-the-money LEAPS still carries some extrinsic value that erodes as expiration approaches, even in a flat stock. The upside is that deep in-the-money, long-dated options tend to decay slowly, and the idea is that the premium you collect from selling short calls can offset that slow bleed. If the short-call income outpaces the long call’s decay, the position can grind out a profit in a sideways market, but that is not guaranteed and depends on how the trade is managed. That balance is the heart of the strategy.
Is a PMCC riskier than a regular covered call?
It depends on how you measure risk. In absolute dollars, a PMCC risks less because your maximum loss is capped at the premium paid for the long call, while a covered-call holder can lose most of the stock’s value in a crash. In percentage terms, though, a PMCC is more leveraged, so a wrong-way move hurts a larger share of your committed capital, and you carry extra risks like time decay, an expiration to manage, and no dividends. It is not simply safer or riskier, it is a different risk shape that suits different traders.
Written by Zach. Educational content only, not financial advice. Options involve risk and all examples are illustrative. Do your own research before trading.
