The Poor Man's Covered Call: Selling Calls Against a LEAPS
Updated
A poor man's covered call (PMCC) is a diagonal spread: you buy a long-dated, deep in-the-money LEAPS call instead of 100 shares, then repeatedly sell short-dated out-of-the-money calls against it. It aims to mimic a covered call for a fraction of the capital — with extra risks that shares do not carry.
How it is built
- Long leg: a deep in-the-money LEAPS call, typically delta 0.75–0.85, 12+ months out
- Short leg: an out-of-the-money call 30–45 days out, often delta 0.20–0.30
- Repeat: when the short call expires or is closed, sell another one
Worked example
Illustrative example only — hypothetical stock XYZ at $100, implied volatility around 30%. Figures are rounded approximations, not live quotes, and ignore fees. One contract = 100 shares.
| Leg | Contract | Price | Delta | Cash / contract |
|---|---|---|---|---|
| Buy | Jan $80 call (~540 days) | $26.50 | 0.80 | −$2,650 |
| Sell | $110 call (~40 days) | $1.60 | 0.25 | +$160 |
| Net | $24.90 debit | ≈ 0.55 | −$2,490 |
Outcomes at the short call's expiration
The best result comes when XYZ finishes near the short strike. Above it, the short call's losses start to offset the LEAPS' gains; below your entry, the LEAPS loses value much faster than the premium collected cushions it.
| XYZ price | Short $110 call | Long $80 call (approx.) | Position P&L |
|---|---|---|---|
| $90 | Expires worthless | ≈ $16.00 | ≈ −$890 |
| $100 | Expires worthless | ≈ $24.80 | ≈ −$10 |
| $110 | Expires worthless | ≈ $35.40 | ≈ +$1,050 (near max) |
| $120 | ≈ −$10.00 to close | ≈ $44.60 | ≈ +$970 |
The strike-width rule
The distance between the strikes ($110 − $80 = $30) should be larger than the net debit ($24.90). If it is not, a sharp rally followed by early assignment on the short call could lock in a loss even though the stock went up. Checking this before entry is one of the simplest ways to avoid the strategy's worst outcome.
PMCC vs a traditional covered call
| Covered call | Poor man's covered call | |
|---|---|---|
| Capital | $10,000 (100 shares) | ≈ $2,490 |
| Dividends | Received | Not received |
| Downside | Shares can fall to zero | LEAPS can lose its whole premium, faster in % terms |
| Assignment | Deliver shares | Must exercise/sell LEAPS or buy shares; may lose LEAPS time value |
| Volatility exposure | Low | High on the long leg (vega) |
Risks to write into the plan
- Early assignment on the short call, especially before an ex-dividend date
- A sharp drop in XYZ: the LEAPS loses more than the calls collect
- Falling implied volatility reduces the LEAPS' value
- Management effort: each short call is a separate trade to plan and close
Track each leg against the plan
A PMCC produces many short-call trades against one long position, which is hard to reconcile in a spreadsheet. In SwingLEAP you can record the LEAPS and each short call as positions on one trade, log every entry and exit, and see the combined P&L — see options trade management. The long leg's strike and delta are covered in Choosing a LEAPS Strike and Delta.
Part of the LEAPS strategies series
New to long-dated options? Start with What Are LEAP Options?, which covers the contract basics and links every LEAPS strategy guide, including the poor man's covered call, rolling LEAPS and LEAPS as stock replacement.