JNJ PMCC Strategy Review: How One LEAPS Position Produced 93% "Dividend Replacement" Income While the Stock Gained 32%

Johnson & Johnson isn't the kind of stock that gets people on CNBC excited. And that's precisely why it's useful for a premium-selling case study.

This JNJ position was one of our Small Dogs holdings inside one of the Wealth Without Shares model portfolios, the LEAPS-based approach we use to gain exposure to out-of-favor Dow components while generating systematic income. The Small Dogs framework filters for names the market isn't currently treating like royalty, and JNJ fit that profile perfectly when we entered.

When a name is liquid, steady, and widely held, it becomes a useful environment for one of my favorite long-term income structures: the Poor Man's Covered Call. You use a deep-in-the-money LEAPS as your stock replacement, then sell shorter-dated calls against it to create repeatable cashflow.

This article is the "show your work" version. Not theory. Not hype. A real JNJ trade with real outcomes, including a premium layer that lost money while the position still delivered strong returns. That's where the lessons live.

The Headline Numbers

I opened this position on May 15, 2025, when JNJ was trading at $153.25. By the time I marked the position for this review, the stock had climbed to around $202, a gain of roughly 32%.

The LEAPS I purchased was the January 15, 2027 $125 call, which cost $33.65 per share ($3,365 per contract). At the mark, that same LEAPS was worth $81.75, a gain of $48.10 per share, or about 143% on the LEAPS itself.

Here's the capital efficiency angle: 100 shares of JNJ would have cost about $15,325. This LEAPS cost $3,365. That's roughly 78% less capital tied up, while still maintaining high-delta exposure. The position delta was roughly 0.80 at entry and 0.94 at the close of the trade, meaning it behaved like owning 94 shares by the end.

Now here's where I have to be completely transparent about what happened with the short calls.

The Short Call Record: A Net Loss

Over the life of the trade, the short call management resulted in a net loss of $16.64 per share ($1,664 per contract).

Here's the actual record:

Read that again. The premium layer, the "income" piece of a Poor Man's Covered Call, lost money on this trade.

This happens. When a stock trends persistently in one direction, your short calls become anchors you have to buy back at a loss to avoid capping your gains or getting assigned. JNJ didn't chop sideways like a "boring dividend stock" is supposed to. It ran.

The Complete Position P&L

Here's what the full position actually returned:

• LEAPS gain: +$48.10 per share

• Short call management: -$16.64 per share

• Net position gain: +$31.46 per share ($3,146 per contract)

On a $3,365 initial investment, that's a 93.5% return on capital over approximately 6-7 months.

For comparison, if you had simply bought 100 shares at $153.25 and sold at $202, you'd have made $48.75 per share, but on $15,325 of capital. That's a 31.8% return.

The PMCC delivered nearly three times the return on capital, even though the short calls were a net drag on the position.

What a PMCC Actually Is

A PMCC is a covered call built with options instead of shares.

The traditional covered call is straightforward: you buy 100 shares, sell a call against them, and collect premium. The Poor Man's version does the same thing, but instead of buying shares, you buy one deep-in-the-money LEAPS to serve as your "synthetic shares." Then you sell a shorter-dated call against it.

Same idea. Different capital requirement.

When the LEAPS is deep enough in the money, most of what you're paying for is intrinsic value, real, stock-like exposure, not fluffy time premium. That's what makes the structure work. You're not speculating on a lottery ticket. You're building a position that behaves like shares but costs a fraction of the price.

Why This Structure Can Outperform on Return on Capital

Let me put it bluntly. If you collect $300 in call premium on $15,325 worth of stock, that's a modest return. If you collect that same $300 on $3,365 worth of LEAPS, it becomes a much bigger percentage yield.

PMCCs don't magically create money. They change the denominator. That's the whole game.

The freed-up capital isn't just "extra buying power." It's optionality. More diversification. More cash reserves. Fewer forced decisions. Better risk posture when volatility hits. In real trading, staying power beats brilliance.

The JNJ Setup: What Made the LEAPS Work (Even When the Calls Didn't)

The first step was building the stock replacement. On May 15, 2025, I bought the JNJ January 15, 2027 $125 call for $33.65. The position delta was approximately 0.80 at entry.

That delta matters more than almost anything else in a PMCC. High delta is what makes the LEAPS behave like shares, which is what makes the "covered call" logic legitimate. If your LEAPS delta is too low, you don't have a stock replacement, you have a lottery ticket with a short call stapled to it.

By the end of the trade, the delta had increased to 0.94 as the stock moved higher and the LEAPS went deeper in the money. That high delta is what allowed the LEAPS to capture $48.10 of the stock's $48.75 move.

The Covered Call Trade-Off in Action

If you've ever sold covered calls, you recognize the pattern in this trade immediately. When price chops or drifts, calls expire or decay beautifully. When price trends hard in your favor, you pay up to roll or reset strikes.

Look at the September $170 call: sold for $2.05, bought back for $10.00. That's a $7.95 loss on a single leg. The December $195 call was even worse: sold for $3.25, bought back for $12.00, a loss of $8.75.

This is not a bug. It's the covered call trade-off made visible.

The difference with a PMCC is that your stock replacement can deliver outsized return on capital when the underlying moves in your favor. The LEAPS did the heavy lifting here. It gained $48.10 while the short call management cost $16.64. The long leg's performance more than offset the premium headwinds.

Two Engines, Not Three

Most traders think of PMCCs as having three profit sources: directional gains, premium income, and capital efficiency. This trade shows why that framing can be misleading.

Engine 1: Directional participation. The LEAPS went from $33.65 to $81.75, a $48.10 gain per share. This worked exactly as designed. High delta meant high participation in the stock's move.

Engine 2: Capital efficiency. I didn't need $15,000 to run this position. I needed about $3,400. That difference creates room for diversification, cash reserves, and better risk posture.

What about the income engine? In this trade, it ran in reverse. The short calls were a net cost, not a net benefit. The "income" layer subtracted $16.64 from the position's return.

That doesn't mean the short calls were a mistake. They were part of a defined process. Sometimes they'll add to returns. Sometimes, especially in trending markets, they'll subtract. The key is having rules so management doesn't become improvisation.

What This Trade Teaches

Lesson 1: PMCCs reward process, not prediction.

I didn't need a perfect forecast. I needed a quality underlying with liquid options, a deep-in-the-money LEAPS with high delta, and a repeatable short-call cadence with defined rules. The process held even when the premium layer didn't cooperate.

Lesson 2: Covered calls are easy until the stock trends.

The biggest "surprise losses" in covered call strategies come from one thing: a stock that refuses to stop going up. That's when your short call becomes an anchor. A PMCC doesn't eliminate that pain. But it can make the long leg powerful enough that you still come out ahead, which is exactly what happened here.

Lesson 3: "Income" can be negative. Track the full picture.

This is where most newsletters lose trust. They show credits. They hide buybacks. The record here shows reality: the short calls lost $16.64 net. The position still returned 93.5% because the LEAPS carried the load. Both numbers matter.

Lesson 4: Delta is the steering wheel.

In this JNJ position, 0.80 to 0.94 delta kept the structure honest. The LEAPS captured nearly all of the stock's move. If you let delta drift too low, you lose the stock-like behavior that makes the whole strategy legitimate.

Lesson 5: The goal isn't to maximize return, it's to maximize repeatability.

A PMCC becomes dangerous when traders treat "less capital required" as permission to run twice as many positions. The real edge is using efficiency to diversify, keep reserves, size smaller, and survive drawdowns.

How to Implement the PMCC Process

This is educational, not advice, but here's the framework I use to keep the strategy repeatable and risk-aware.

Choose the right underlying. Look for liquid options with tight spreads and real volume. Choose underlyings you're comfortable holding exposure to over time. Clean chains where volume is distributed across strikes, not concentrated in one place.

Build a real stock replacement. LEAPS expiration is typically 12 to 24 months out, sometimes longer. Delta is typically 0.75 to 0.90 or higher, the higher the better for stock-like behavior. Minimize "fluff" by avoiding contracts loaded with extrinsic value you're paying for but don't need.

Sell short calls with a rule, not a vibe. Many traders anchor to 30 to 45 days until expiration and 0.20 to 0.30 delta calls. Define your management triggers in advance: profit targets, roll windows, delta limits. Write them down. Follow them.

Treat early assignment as a calendar issue, not a catastrophe. Dividend-paying stocks like JNJ can create early assignment risk on short calls. Manage it with awareness of ex-dividend timing, rolling before the call becomes deep in the money with minimal extrinsic, and not getting lazy just because it's a "conservative" stock.

Size like a professional. The easiest way to blow up a "conservative" strategy is to oversize it. Use the structure to reduce portfolio stress, not to multiply it.

The Bottom Line

JNJ moved from $153.25 to about $202, a gain of roughly 32%.

The deep-in-the-money LEAPS moved from $33.65 to $81.75, a gain of $48.10 per share (143%).

The short call management cost $16.64 per share, a net loss on the premium layer.

Net position gain: $31.46 per share, or 93.5% return on the original $33.65 LEAPS cost.

This trade shows the PMCC in an honest light: the directional engine saved a rough premium run. When you have high-delta LEAPS exposure and the stock moves strongly in your favor, you can absorb short-call losses and still deliver excellent return on capital.

The strategy isn't perfect. The short-call management can be messy, and expensive when the stock trends. But if you want a capital-efficient structure that participates in moves while keeping more cash available for diversification and reserves, this framework is worth studying.

Just don't expect every layer to contribute every time. Sometimes the LEAPS does all the work. That's part of the game.

Probabilities over predictions,

Andy

P.S. This is the kind of case study I publish regularly, real math, real management, real lessons. If you want more trade breakdowns, clearer entry and exit rules, and the "why" behind the structures, that's exactly what The Option Premium is built for.

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Disclaimer: This is educational content only. Not investment advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money.