Is Inflation Here to Stay? How to Profit with Poor Man’s Covered Calls on Gold

Inflation’s trajectory remains uncertain, but one thing is clear: it continues to climb. And as history has shown, when inflation rises, safe-haven assets like gold tend to follow suit. Just take a look at gold’s recent price surge.

How Can Investors Capitalize on Inflation’s Climb?

One obvious approach is to trade gold directly. But for options traders, there’s an even more capital-efficient way to play this trend—by leveraging a poor man’s covered call (PMCC) strategy on SPDR Gold Shares ETF (GLD).

Why Not a Traditional Covered Call?

Covered calls are a solid income-generating strategy, but they require purchasing at least 100 shares of stock. And with GLD trading around $267 per share, buying 100 shares would cost $26,700—a significant capital commitment.

Enter the poor man’s covered call—a lower-cost alternative that mimics a covered call but requires far less capital.

A Quick Breakdown: Poor Man’s Covered Calls

A poor man’s covered call is essentially a long call diagonal debit spread, designed to replicate a covered call but without owning the underlying stock. Instead, you buy a long-term, in-the-money (ITM) call option, known as a LEAPS (Long-Term Equity Anticipation Securities), which acts as a stock replacement. Then, you sell shorter-term calls against that LEAPS position to generate income.

Why Choose LEAPS?

Unlike shorter-dated options, LEAPS don’t suffer from rapid time decay. They also provide leverage, allowing traders to control a large position for a fraction of the capital required to own the shares outright.

Most importantly, PMCCs free up capital, reducing the cost by 65% to 85% compared to a standard covered call strategy. That capital can then be redeployed into additional trades, enhancing overall portfolio efficiency.

Setting Up a Poor Man’s Covered Call on GLD

Using GLD as an example, let’s walk through the setup of a PMCC trade.

Step 1: Buy a Deep In-the-Money LEAPS Call

Scanning GLD’s options chain, we identify the 249 strike call going out 683 days until expiration with a delta of 0.80, trading at approximately $44.70 per contract. Instead of spending $26,700 to buy 100 shares, we only need $4,470 to control the same exposure—a savings of 83.3%.

Step 2: Sell a Short-Term Call for Income

Now, we sell a near-term call against our LEAPS position. Ideally, we look for a strike price with a delta between 0.20 and 0.40—a probability of success between 60% and 85%.

For this trade, the 278 strike call expiring in 45 days has a delta of 0.26 and can be sold for roughly $2.22 per contract. This premium offsets our initial investment, reducing our total outlay to $4,248 ($4,470 - $222). That’s an immediate return of 5.0% over 45 days.

For comparison, a traditional covered call on GLD would only yield 0.8% over the same period.

Trade Breakdown

• Buy: GLD January 15, 2027, 249 LEAPS call for $44.70

• Sell: GLD April 17, 2021, 278 call (45 DTE) for $2.22

• Total Cost: $4,248

• Potential Monthly Return: 5.0%

• Annualized Potential Return from Premium (Not including capital gains from LEAPS): ~40%

What If GLD Rises Above the Short Call Strike?

If GLD surpasses our short call strike of 278, our LEAPS contract will still appreciate, adding potential capital gains to our income from short call sales. Unlike a traditional covered call, where gains are capped at the short call strike, a PMCC allows for continued upside—until the delta of the short call equals that of the long call. When that happens, traders can either close the position for a profit or roll the short call further out.

Final Thoughts: The Power of Poor Man’s Covered Calls

PMCCs offer an efficient, capital-light alternative to traditional covered calls, especially for high-priced stocks or ETFs like GLD. By reducing capital requirements, traders can diversify across multiple positions, boosting overall portfolio returns while maintaining a steady stream of premium income.

Whether you’re bullish on gold due to inflation fears or simply looking for a smarter way to deploy capital, the PMCC strategy deserves a place in your trading arsenal.

If you would like learn more about poor man’s covered calls check out: Featured Report: Poor Man’s Covered Calls Explained: A Smart Strategy for Today’s Market

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Probabilities over predictions,

Andy Crowder