The Poor Man's Covered Call (PMCC) is a powerful options strategy for investors who want to generate income like a traditional covered call — but with less capital. Let’s break down how to set one up and manage it successfully.
What Is a Poor Man’s Covered Call?
A traditional covered call involves buying 100 shares of a stock and selling a call option against those shares. However, owning 100 shares of a high-priced stock can tie up a lot of cash. The PMCC replicates this strategy with a long-dated call option (LEAP) acting as a stock substitute.
In simple terms:
- Buy a LEAP call (an option with an expiration date 6 months to 2 years out)
- Sell a shorter-term call (a weekly or monthly call option with a higher strike price)
This setup reduces the capital requirement while still providing premium income.
Step 1: Choose Your Stock
Pick a stock or ETF that you’re bullish on long-term. The PMCC works best on stable, blue-chip stocks or ETFs that have good liquidity and option chains — think AAPL, MSFT, or SPY.
Step 2: Buy a LEAP Call
Look for an in-the-money (ITM) LEAP call with a delta of around 0.80. This means the call option moves similarly to the stock price. A delta of 0.80 means the option gains or loses $0.80 for every $1 the stock moves.
For example:
- Stock: XYZ trading at $100
- Buy a LEAP call with a strike price of $80, expiring in January 2026
Step 3: Sell a Shorter-Term Call
Sell a near-term out-of-the-money (OTM) call — usually a monthly expiration 1-2 strikes above the current stock price. I like to choose between 0.50 and 0.30 Delta. The lower lower the call delta, the more upside potential a trade has.
For example:
- Sell XYZ $105 call expiring in 30 days
This generates premium income, just like a covered call. Repeat this monthly or weekly to collect consistent income.
Managing the Trade
✅ If the stock stays flat or slightly rises:
- You keep the premium. Once the short call expires, sell a new one.
✅ If the stock drops:
- Your LEAP loses value, but the short call will likely expire worthless — meaning you still keep the premium. Consider selling another call to offset losses.
✅ If the stock rises too much:
- Your short call may get exercised. You can roll the call (buy back the old call and sell a new one with a later expiration or higher strike) to avoid assignment.
Key Risks
- Time decay (theta): The LEAP loses value over time, but the short calls help offset this.
- Assignment risk: If the stock rises past the short call strike, early assignment is possible — though rare. Rolling the call can help avoid this.
- Volatility changes: If volatility drops, both the LEAP and short calls may lose value.
Final Thoughts
The Poor Man’s Covered Call is a flexible, lower-cost alternative to traditional covered calls. It’s especially useful for generating income on expensive stocks without tying up too much capital.
Mastering the PMCC takes practice — but once you get comfortable with rolling calls and managing assignments, it can be a steady income generator.
Are you ready to try a PMCC, or do you prefer the simplicity of traditional covered calls? Let me know in the comments!