What Is a Covered Call With LEAPS?
A covered call with LEAPS, also known as a poor man's covered call (PMCC) or diagonal debit spread, replaces the 100 shares of stock in a traditional covered call with a deep in-the-money LEAPS call option. Instead of investing $15,000 to own 100 shares of a $150 stock, you buy a deep ITM LEAPS call for approximately $3,800, achieving similar upside exposure at a fraction of the capital cost. You then sell near-term calls against the LEAPS position to generate income, just as you would with stock.
The PMCC strategy is especially popular among traders with smaller accounts who want to participate in covered call strategies on expensive stocks like Apple, Microsoft, or NVIDIA without committing $15,000-$50,000 per 100 shares. The tradeoff is that you do not collect dividends, you have a time limit on the position (the LEAPS expiration), and the risk profile differs from a standard covered call in important ways.
For a PMCC, buy LEAPS with at least 6-12 months to expiration, a delta of 0.70-0.85 (deep ITM), and an extrinsic value that is reasonable relative to the premium you plan to collect from selling short-term calls. The deeper ITM the LEAPS, the more it behaves like stock (delta near 1.0) but the more capital it requires.
PMCC Formulas
- 1Net debit = $38.00 - $3.50 = $34.50 per share
- 2Capital required = $34.50 x 100 = $3,450 (vs $15,000 for 100 shares)
- 3Capital savings = 1 - ($3,450 / $15,000) = 77%
- 4Max profit = ($155 - $120 - $34.50) x 100 = $50 per spread
- 5Max loss = $34.50 x 100 = $3,450 (if stock drops below $120 at LEAPS expiration)
- 6Breakeven = $120 + $34.50 = $154.50
- 7Return on capital if max profit = $50 / $3,450 = 1.4% per 30 days
- 8Annualized return = 1.4% x (365/30) = 17.4%
PMCC vs Traditional Covered Call
| Factor | PMCC (LEAPS) | Traditional Covered Call | Winner |
|---|---|---|---|
| Capital Required | $3,000-$5,000 | $10,000-$50,000 | PMCC |
| ROI Percentage | Higher % return | Lower % return | PMCC |
| Dollar Profit | Lower $ amount | Higher $ amount | Traditional |
| Dividend Income | None | Yes | Traditional |
| Time Limitation | LEAPS expires | No expiration | Traditional |
| Downside Risk | Limited to debit | Full stock risk | PMCC |
| Assignment Handling | More complex | Simple delivery | Traditional |
Setting Up a PMCC Step by Step
How to Execute a Poor Man's Covered Call
- The PMCC has limited downside risk: you can only lose the net debit paid, unlike stock ownership
- Sell new short calls every 20-45 days to continuously generate income against the LEAPS
- If the stock drops significantly, the short call expires worthless but the LEAPS loses value; consider rolling the LEAPS down if your thesis has changed
- Never sell a short call at a strike below your LEAPS strike plus net debit; this creates a guaranteed loss scenario
- PMCC works best on stocks with upward or sideways trends and moderate implied volatility
If the stock drops below your LEAPS strike, the LEAPS loses intrinsic value rapidly and time decay accelerates. Unlike stock, LEAPS options expire: if the stock does not recover before the LEAPS expiration, you lose your entire investment. Always set a stop-loss or exit plan if the stock breaches key support levels.
When your LEAPS has 3-4 months remaining, consider rolling it to a new LEAPS with 12+ months to expiration. This extends the life of the position and prevents time decay from eroding the LEAPS too quickly. Roll when the stock is near or above your original LEAPS strike for the most cost-efficient roll.