Poor Man's Covered Call (PMCC)
A Poor Man’s Covered Call, or PMCC, is a long call diagonal spread. Instead of owning 100 shares, the position uses a longer-dated in-the-money call alongside a shorter-dated short call. The strategy requires less initial capital than a traditional covered call, but the long call introduces expiration, theta, and implied-volatility risk that common stock does not have.
How the PMCC Works
Instead of buying 100 shares of a $100 stock for $10,000, you buy a longer-dated call option with a target delta of approximately 0.70, selecting the furthest expiration available. Let's say this call costs you $2,500.
A higher-delta long call generally has greater sensitivity to movements in the underlying stock. However, the option does not behave exactly like 100 shares. Delta can change, and the contract is also affected by time decay and implied volatility. The long call forms the long leg of the diagonal spread and may support the shorter-dated call position, subject to the brokerage’s options approval and position requirements.
The Two Legs of a PMCC
- Leg 1 (The Long Leg): Buy a deep ITM call option. For my setup, I generally target approximately 0.70 delta and buy the furthest expiration available.
- Leg 2 (The Short Leg): Sell an OTM call option. I generally favor lower-delta contracts, often around 0.10 to 0.20 delta, and shorter expirations. My goal is to collect premium without unnecessarily capping the upside of a LEAPS position I remain bullish on.
Evaluating the Strategy
Capital Allocation: In the example above, you control the long exposure for $2,500 instead of $10,000. This frees up the remaining capital to be deployed elsewhere in your portfolio.
Return Percentages: Because a PMCC generally requires less initial capital than purchasing 100 shares, short-call premium may represent a higher percentage return on the capital committed. That does not mean the strategy automatically produces a higher overall return. The long call also carries expiration, theta, and volatility risk.
Defined Downside: The long call’s maximum loss is generally limited to the premium paid. However, a 100-share stock position and a long call do not represent identical exposure. Shares have no expiration date, while the long call can lose its entire value by expiration even if the company later recovers.
Key Risks of a PMCC
A PMCC is a diagonal spread, meaning it carries more complexity and different risk factors than a standard share-backed covered call:
- Underlying stock decline. A major decline in the stock price will reduce the value of the long call, and can result in losing 100% of the premium paid for the long leg.
- Capped upside. If the stock rallies rapidly, your short call will be assigned. Short-call strike selection should consider the long-call strike, original debit, premium previously collected, and the potential outcome if the short call moves in the money. A simple breakeven calculation can be useful at entry, but the economics of the position change as additional short calls are sold or rolled.
- Assignment management. If the short call is assigned, the trader must satisfy the resulting share-delivery obligation. Depending on the account and brokerage, managing the position may require closing or exercising the long call, closing other legs, or otherwise addressing the resulting position.
- Liquidity risk. Thinly traded options can have wide bid/ask spreads, causing high entry and exit costs on both legs.
Theta and Vega
Unlike shares, a LEAPS contract loses time value as expiration approaches and is sensitive to changes in implied volatility. A decline in implied volatility can reduce the value of the long call even when the underlying stock has not moved significantly.
The short call also has its own theta and vega exposure. A PMCC therefore requires managing two options with different strikes and expirations rather than simply owning shares.
Dividends and Early Assignment
A LEAPS call does not receive dividends. The short call may also face increased early-assignment risk around an ex-dividend date, particularly when it is in the money and has little remaining extrinsic value. I review dividend dates and the remaining extrinsic value of short calls when managing these positions.
How I Use PMCCs
I use PMCCs selectively as part of my broader portfolio strategy. The LEAPS position comes first because I am bullish on the underlying company. I do not buy a LEAPS simply because I want to sell short calls against it.
When I sell a call against a LEAPS position, I generally use a conservative strike because I do not want short-term premium generation to interfere with the long-term thesis. My goal is not to maximize weekly premium. If the available call premium does not justify the risk of capping the LEAPS position, I can simply hold the long call.
⚠️ This article is for educational purposes only. Options trading involves substantial risk of loss. Not financial advice.