What Is a Poor Man’s Covered Call — and Can It Really Replace Owning 100 Shares?
I’ve taught covered calls to over 1,400 students, and here’s the question I hear more than almost any other: “Mark, I love the idea of collecting premium, but I don’t have enough capital to buy 100 shares of NVDA or AMZN.”
I get it. At today’s prices, buying 100 shares of a high-quality stock can mean tying up $17,000 to $25,000 — or more. For many income-focused investors, that’s a significant chunk of their portfolio in a single position. And diversification matters.
That’s where the Poor Man’s Covered Call (PMCC) comes in. It’s a strategy that lets you collect weekly or monthly premium — just like a traditional covered call — but with 60% to 85% less capital at risk. Let me walk you through exactly how it works, when to use it, and the key risks you need to understand before placing a single trade.
The Problem: Great Stocks, Big Price Tags
Consider a stock like AAPL trading around $248 per share. To write a traditional covered call, you’d need to own 100 shares — that’s roughly $24,800 in capital. If you want to run a diversified portfolio of 5 to 8 positions generating $10,000 a month in covered call income, you’re looking at $100,000 or more just in stock holdings.
For investors just getting started — or retirees who want to deploy capital more efficiently — that’s a real barrier. The PMCC is designed to solve exactly this problem.
How the Poor Man’s Covered Call Works
The Poor Man’s Covered Call is technically a diagonal spread. Instead of buying 100 shares of the underlying stock, you purchase a deep in-the-money LEAPS call option — a long-dated call with at least 6 to 12 months until expiration. This LEAPS option acts as your stock substitute.
Then, just like a traditional covered call, you sell short-term call options against that LEAPS position to collect premium income.
Here’s the basic structure:
- Buy: A deep ITM LEAPS call (70–90 delta, 6–18 months out)
- Sell: A near-term out-of-the-money call (20–35 delta, 30–45 days out)
The LEAPS option moves almost dollar-for-dollar with the stock (because of that high delta), giving you similar upside exposure. Meanwhile, the short call you sell generates income — just like collecting rent on a property you own.
A Real-World Example: AAPL Poor Man’s Covered Call
Let’s walk through a hypothetical educational example using AAPL trading near $248:
| Component | Details | Approximate Cost |
|---|---|---|
| Buy LEAPS Call | $200 strike, 12 months out, ~85 delta | $5,500 (debit) |
| Sell Monthly Call | $260 strike, 30 days out, ~25 delta | $320 (credit) |
| Net Debit | Cost to enter position | $5,180 |
Compare that to buying 100 shares at $248, which would cost $24,800. With the PMCC, you’ve deployed roughly $5,180 — about 79% less capital.
If AAPL stays below $260 at the short call’s expiration, you keep the full $320 premium and sell another monthly call. That’s a potential 6.2% return on capital for the month — and you can repeat this cycle every 30 to 45 days.
Over the course of a year, if you collect an average of $300 per month, that’s $3,600 in potential premium income on a $5,180 investment — a hypothetical 69% annual return on the capital deployed. Of course, actual results will vary based on market conditions, timing, and strike selection.
What About Owning Shares Instead?
If you’d used $24,800 to buy 100 shares and sold the same $260 call monthly, you’d collect the same $320 premium — but your return on capital is only about 1.3% per month. The PMCC doesn’t change how much premium you collect; it changes how much capital you need to collect it.
Key Rules for a Successful PMCC
Based on my 40+ years of trading experience, here are the guidelines I teach my students in the Free MasterCourse:
1. Choose the Right LEAPS Delta
Target a delta between 0.70 and 0.90. The deeper in the money your LEAPS is, the more it behaves like the underlying stock. I generally prefer the 80–85 delta range — it gives you strong stock-like behavior while keeping the cost significantly lower than 100 shares.
2. Go Long on Expiration
Buy LEAPS with at least 9–12 months until expiration. Time decay (theta) accelerates dramatically in the final 90 days of an option’s life. You want your long LEAPS to be far enough out that it holds its value while your short calls erode. I typically look at LEAPS in the 12- to 18-month range.
3. Sell Short Calls at 25–35 Delta
This is similar to how we approach strike price selection in traditional covered calls. The 25–35 delta range gives you a good balance between premium collected and probability of the call expiring worthless.
4. Roll Your LEAPS Before 6 Months Left
When your LEAPS has about 6 months remaining, consider rolling it out to a new LEAPS with a later expiration date. This keeps you in the “slow decay” zone and maintains the capital efficiency advantage.
Risk Management: What Can Go Wrong
No strategy is without risk, and the PMCC has some important nuances you must understand:
Maximum Loss Is Your Net Debit
Unlike owning shares — where a $248 stock could theoretically go to zero and you’d lose $24,800 — with the PMCC your maximum risk is limited to the net debit you paid. In our AAPL example, that’s approximately $5,180. That’s a defined-risk trade, which many investors find attractive.
No Dividends
Because you don’t own the actual shares, you don’t collect dividends. For high-dividend stocks, this is a real cost to consider. However, for many of the growth-oriented names we focus on in our covered call watchlist, dividends are minimal anyway.
Assignment Risk on the Short Call
If your short call goes in the money and gets assigned, you’ll end up with a short stock position. The fix? Exercise your LEAPS to cover the short shares. This is manageable, but it’s important to have a plan before it happens — not during.
Wider Bid-Ask Spreads on LEAPS
LEAPS options can have wider bid-ask spreads, especially on less liquid stocks. Stick to highly liquid names with active options markets — think stocks with high average daily volume and tight option spreads.
Approval Level Required
The PMCC requires spread trading approval from your broker (typically Level 2 or Level 3, depending on the broker). If you’re trading covered calls in an IRA, check with your broker about whether diagonal spreads are permitted in your account type.
PMCC vs. Traditional Covered Call: Side-by-Side
| Feature | Traditional Covered Call | Poor Man’s Covered Call |
|---|---|---|
| Capital Required | $24,800 (100 shares at $248) | ~$5,180 (LEAPS option) |
| Monthly Premium | ~$320 | ~$320 |
| Return on Capital | ~1.3%/month | ~6.2%/month |
| Max Loss | Full share value | Net debit paid |
| Dividends | Yes | No |
| Broker Approval | Level 1 (basic) | Level 2–3 (spreads) |
| Complexity | Lower | Moderate |
When Does the PMCC Make Sense?
The Poor Man’s Covered Call is particularly well-suited for:
- Investors with smaller accounts who want covered call income without needing $20K+ per position
- Diversification seekers — deploy capital across 5–8 positions instead of concentrating in 1–2
- Traders who want defined risk — your maximum loss is known from the start
- Those bullish on a stock’s medium-term direction but wanting to generate income along the way
It may be less ideal if you’re focused on collecting dividends, trading less liquid options, or if you prefer the simplicity of owning shares outright.
Frequently Asked Questions
Is the Poor Man’s Covered Call really a “poor man’s” strategy?
The name is a bit misleading. It’s not about being poor — it’s about being capital-efficient. Many experienced traders with large accounts use PMCCs to allocate capital more effectively across multiple positions. It’s a smart capital management tool, regardless of account size.
Can I use a PMCC in a retirement account?
It depends on your broker and account type. Many brokers allow diagonal spreads in IRAs, but some don’t. You’ll typically need spread trading approval. Check with your broker’s options desk to confirm what’s allowed in your specific account.
What happens if the stock drops significantly?
If the stock drops sharply, both your LEAPS and short call lose value. The short call expiring worthless is actually a win — you keep that premium. Your LEAPS will have lost value, but your total risk is capped at the net debit you originally paid. You can continue selling monthly calls against the LEAPS to reduce your cost basis over time.
How does this relate to Mark’s Cash Flow Machine system?
The PMCC shares the same core philosophy as our three strategies — Fortress, Balance Point, and Rocket. All are INCOME strategies, not capital gains strategies. The PMCC is simply another tool in the income investor’s toolkit that can complement a traditional covered call portfolio when capital efficiency matters.
The Bottom Line
The Poor Man’s Covered Call is one of the most capital-efficient ways to generate options income. It won’t replace traditional covered calls entirely — both have their place — but for investors who want to collect premium, manage risk, and deploy capital more efficiently, the PMCC deserves serious consideration.
If you’re ready to learn how I build systematic income portfolios using covered calls and related strategies, watch the Free MasterCourse here. In about 50 minutes, I’ll walk you through the exact framework my students use to target consistent monthly cash flow.
And for more in-depth education on options income strategies, check out my YouTube channel where I share weekly market analysis and trade breakdowns.
The information in this article is for education and information purposes only. This is not financial advice. Individual results may vary. Options involve risk and are not suitable for all investors. Past performance does not guarantee future results. Please consult a licensed financial professional before making any investment decisions.