What Is a Poor Man's Covered Call?
A poor man's covered call (PMCC), also known as a diagonal call spread, replaces the stock position in a traditional covered call with a deep in-the-money LEAPS call option. Instead of buying 100 shares at $150 ($15,000), you buy a LEAPS call with a $120 strike for $35 ($3,500). You then sell short-term calls against this LEAPS position, collecting premium just like a traditional covered call. The result is a similar income strategy with roughly 75% less capital.
The PMCC is popular among traders who want covered call income but lack the capital to buy 100 shares of expensive stocks. It also allows greater diversification since you can spread your capital across more positions.
PMCC vs. Traditional Covered Call
| Feature | Traditional CC | Poor Man's CC |
|---|---|---|
| Capital Required | $15,000 (100 shares) | $3,500 (LEAPS call) |
| Premium Income | $3.00/share/month | $3.00/share/month |
| Max Profit | Unlimited below LEAPS expiry | Limited to spread width |
| Max Loss | $15,000 (stock to $0) | $3,500 (LEAPS value) |
| Return on Capital | 2.00%/month | 8.57%/month |
| Dividend Income | Yes | No |
| Time Decay on Long Leg | None | Yes (LEAPS loses value) |
PMCC Formulas
- 1Net debit = $35.00 - $3.00 = $32.00 per share
- 2Capital required = $32.00 x 100 = $3,200
- 3Max profit = ($155 - $120 - $32) x 100 = $300 (first month)
- 4Max loss = $32.00 x 100 = $3,200
- 5Breakeven = $120 + $32 = $152
- 6Short call return = $3.00/$35.00 = 8.57%/month
- 7vs. Traditional CC: $3.00/$150 = 2.00%/month
Unlike owning stock, your LEAPS call loses time value every day. A $35 LEAPS with 540 DTE loses approximately $0.065/day in theta initially. Over a year, that could be $20+ in time decay if the stock stays flat. Your short call premium must exceed the LEAPS theta decay to be profitable.