Featured Report: Poor Man’s Covered Calls Explained: A Smart Strategy for Today’s Market

If you've spent any time in the options world, you know the appeal of a covered call. It's simple, straightforward, and allows you to generate steady income from stocks you already own. But today, I want to discuss what I believe is a superior alternative—one that’s more flexible, cost-effective, and powerful: the “poor man’s covered call.”

Unlike a traditional covered call, this strategy doesn’t require you to hold 100 shares of stock. Instead, with far less capital, you can harness the same benefits—and perhaps even more. It’s known as a “poor man’s covered call” or, in technical terms, a long call diagonal debit spread. The appeal is obvious: you get the essential advantages of a covered call without the steep price tag. In most cases, it’s 65% to 85% cheaper, freeing up more of your capital to diversify or explore new income streams.

What are the Goals of a Poor Man’s Covered Call Strategy?

The goals of a poor man’s covered call strategy center on maximizing income and capital efficiency while managing risk in options trading. Here’s a breakdown of the main objectives:

1. Generate Consistent Income: By selling short-term calls against a long-term LEAPS call option, traders can collect premium income on a regular basis, similar to the income generated by traditional covered calls. This steady income stream helps reduce the overall cost of the position.

2. Reduce Capital Requirement: Unlike traditional covered calls, which require buying 100 shares of stock, the poor man’s covered call uses a LEAPS option as a “stock replacement.” This reduces the capital needed to establish a position by roughly 65-85%, making it more accessible and freeing up capital for other investments.

3. Achieve High Return on Capital: The poor man’s covered call aims to achieve a higher return on capital than a traditional covered call. The lower capital commitment, combined with the income from selling calls, can lead to a greater percentage return compared to investing in 100 shares.

4. Capture Upside Potential: While the strategy is typically more income-focused, the LEAPS option can benefit from increases in the underlying stock's price, offering potential capital appreciation if the stock moves higher.

5. Lower Cost Basis Over Time: Each premium collected from selling calls effectively reduces the cost basis of the LEAPS option, allowing the investor to accumulate gains even if the underlying stock doesn’t significantly increase in value.

6. Diversify Income Streams: With the capital saved, traders can diversify their portfolio by implementing the poor man’s covered call on multiple securities or combining it with other strategies, reducing overall risk and creating varied sources of income.

7. Minimize Time Decay Losses: By using LEAPS options with long expiration dates, the strategy minimizes losses due to time decay, which accelerates as options near expiration. This gives the trader more time to benefit from the position.

In summary, the poor man’s covered call strategy is designed to maximize income potential, reduce capital outlay, manage risk, and allow for diversification, all while maintaining flexibility in capturing upside in the underlying stock.

Here’s How It Works 

Instead of shelling out tens of thousands of dollars for 100 shares of stock, you buy a “stock replacement”—specifically, a long-term, in-the-money LEAPS call option. LEAPS, or long-term equity anticipation securities, are options that don’t expire for at least a year, giving them a stability that shorter-term options lack. This longer horizon minimizes the issue of time decay and lets you execute a strategy with a significantly reduced initial cost.

There’s no doubt that security selection is key here. Implied volatility (IV) can guide us, helping us set realistic expectations about risk and return within a 20- to 45-day window. We aim to find stocks that allow us to keep our positions properly sized across our portfolio while tapping into steady premiums. Done right, the poor man’s covered call allows for a diversification approach that is seldom accessible with traditional covered calls.

Take Ray Dalio’s All-Weather Portfolio as a case in point. This diversified, resilient portfolio is designed to thrive in any economic climate, from boom to bust. Dalio himself created it to hedge against market uncertainty and unexpected shocks. A core holding in the All-Weather Portfolio is gold, represented well by the SPDR Gold Trust ETF (GLD). Let’s imagine GLD is trading at $242.14 with an implied volatility (IV) of around 19%. A traditional covered call would require buying 100 shares, costing you $24,214 upfront—a decent sum, especially if you plan to diversify across multiple stocks. 

• Cost of SPDR Gold Trust (GLD) 100 Shares: $242.14 × 100 = $24,214

The poor man’s covered call, by contrast, lets us skip the high upfront cost by buying a LEAPS call instead of shares. Suppose we opt for the January 15, 2027, expiration, giving us a LEAPS contract with 795 days remaining.

An in-the-money 225 call option with a delta of 0.85, priced at around $43.30, becomes our “stock replacement.”

• Cost of SPDR Gold Trust (GLD) January 15, 2027 225 calls: 1 contract = approximately $43.30 or $4,330

So instead of $24,214, we’re looking at a for more manageable outlay of $4,330, saving us $19,884—over 82% in capital! With that savings, we can diversify further, creating an even wider net of potential income streams.

The Source of Income

Once we’ve established our LEAPS position, we can begin selling short-term calls (15 to 60 days) against it—similar to the way we’d manage a traditional covered call, but with a fraction of the capital commitment. By selling calls with a delta of around 0.20 to 0.40 (roughly a 60-85% probability of success), we capture premium income.

For example, selling the 252 strike call with a 0.24 delta nets us about $1.68 per share or $168 per contract, immediately lowering our cost basis to $4,162.

This 3.9% return over 39 days can be repeated up to 9 or 10 times a year, amounting to roughly a 39% annual return on capital in premiums alone—more than triple the return a traditional covered call would provide.

And the 3.9% from premiums is just the beginning. Any rise in GLD’s price boosts the value of our LEAPS as well. In fact, you could potentially leverage this further, buying two LEAPS for every short call sold if you have a strong bullish conviction. Either way, you can keep selling calls against the LEAPS until there’s less than a year left to expiration, maximizing income while managing risk.

This approach has enabled me to build a diversified strategy around poor man’s covered calls using a variety of low, medium and high-risk portfolios. By freeing up 65-85% of the capital that would otherwise go into a traditional covered call, I can implement varied approaches across proven investment strategies, like the All-Weather Portfolio, O’Shaughnessy’s Growth/Value Portfolio, Faber’s Shareholder Yield, MAG 7, Small Dogs of the Dow, Dividend Aristocrats, Bitcoin or Buffett’s Patient Investor Portfolio. Each taps into a different set of market assumptions and opportunities, all supported by the capital saved with poor man’s covered calls.

If you’re intrigued and want to explore the income and flexibility that this strategy brings, don’t hesitate to reach out. I’m always happy to help guide you through the finer points.