Maximizing Returns with a Poor Man’s Covered Call Strategy: A Smarter Way to Trade Options

If you're familiar with options trading, then you probably know that one of the most popular strategies is the covered call. It’s straightforward, relatively simple to manage, and often used by investors to generate a steady stream of income or to reduce the cost basis of stocks they already own. But as with any strategy, there are always ways to improve efficiency — and one such improvement is the poor man’s covered call.

While a traditional covered call requires you to own 100 shares of a stock, the poor man’s covered call enables you to replicate that strategy with much less capital, potentially yielding greater returns on your investment. Today, let’s explore how this strategy works and why it’s an attractive alternative to the standard covered call.

What Is a Poor Man’s Covered Call?

A poor man’s covered call, or in technical terms, a long call diagonal debit spread, allows you to achieve the same benefits of a covered call without needing to purchase 100 shares of the underlying stock. In essence, you are replacing the need to buy stock with an in-the-money LEAPS call option.

For the uninitiated, LEAPS (Long-Term Equity Anticipation Securities) are options that have at least one year before expiration. The reason LEAPS are so effective for this strategy is because they have slower time decay compared to shorter-term options, which helps maintain their value over a longer period.

In fact, implementing a poor man’s covered call typically costs between 65% to 85% less than the traditional method, making it a compelling strategy for investors looking to optimize their capital and improve returns.

The Poor Man’s Covered Call strategy not only provides a cost-effective way to generate income from options trading but also allows for greater diversification in your portfolio. By using LEAPS call options as a stock replacement, investors can control large positions with significantly less capital, freeing up resources to spread across multiple stocks or sectors. This approach helps reduce the risk of concentrated holdings in one or two assets, enabling a more balanced portfolio while still capturing the income potential of a covered call strategy. As a result, investors can optimize both capital efficiency and diversification without sacrificing the benefits of income generation or upside potential.

The Bullish Nature of the Poor Man’s Covered Call

While the poor man’s covered call shares the same structure as a traditional covered call, there’s one key difference: capital efficiency. Instead of spending thousands of dollars to buy 100 shares of stock, you purchase a LEAPS call option that acts as a stock replacement. This drastically reduces the initial outlay required, allowing you to capture the same benefits of income generation and lower cost basis, but with far less financial commitment.

For example, imagine you’re interested in trading a high-priced stock like Microsoft (MSFT). A typical covered call strategy would require you to buy at least 100 shares of Microsoft stock, which at a price of $429.03 per share would cost you around $42,903. For many investors, that’s a sizable amount of capital tied up in a single stock, potentially limiting your ability to diversify.

But with a poor man’s covered call, you don’t need to shell out that much. Instead, you can buy a LEAPS call with a longer expiration date (725 days), reducing your capital investment by 65% to 85% depending on which call strike you choose.

How to Execute the Poor Man’s Covered Call

Let’s break this down step-by-step using Apple stock as an example.

1. Choose the LEAPS Call Option: The first step is to select a LEAPS call option with an expiration date at least one year out. My preference is for options with a two-year expiration. For instance, at the time of writing, Microsoft has a January 15, 2027 expiration with 725 days remaining, which fits perfectly into the timeline I prefer.

2. Look for an In-the-Money Strike: Once you've chosen your expiration cycle, you’ll want to look for an in-the-money call strike with a delta of around 0.80. This helps you get a closer correlation to owning the stock itself, which is crucial for maximizing the effectiveness of this strategy.

   

   Microsoft January 15, 2027, 360 calls with a delta of 0.79.

   For Microsoft, the 360 strike call (which is in-the-money) has a delta of 0.79, and it’s priced at around $117.00. This is the option you’ll purchase to replicate owning 100 shares of Microsoft. So, instead of paying $42,903 for the stock, you only need to pay $11,700 for the LEAPS call, saving you $31,203, or approximately 72.7% of the cost.

3. Sell Calls Against Your LEAPS: Once you’ve purchased the LEAPS call, the next step is to sell calls against it — just as you would in a traditional covered call strategy. I prefer to look for options with 30 to 60 days until expiration and select a strike with a delta ranging from 0.15 to 0.40. This gives me a 60% to 85% probability of success for the short call position.

   

   Microsoft February 28, 2025, 450 calls with a delta of 0.30.

   For instance, if we look at a Microsoft option chain, the 450 call strike (with a delta of 0.30) might be ideal for selling calls. This would allow us to collect a premium of about $5.90 for every call we sell.

4. Calculate Your Total Investment and Return: After selling the call, the total cost of the position (taking into account the premium collected) is $117.00 ($117.00 - $5.90). This means that your return on capital is 5.0% over the 39-day period. This is significantly better than the return from a traditional covered call, where the potential return might be only 1.4%.

   And remember, the 5.0% return doesn’t even account for any potential capital gains in the LEAPS position if the stock appreciates. This is simply the income generated from selling premium.

Additional Flexibility with the Poor Man’s Covered Call

One of the great benefits of this strategy is its flexibility. If you're more bullish on the stock, you can opt to buy two LEAPS contracts for every call sold or some alternative ratio. By adding extra LEAPS contracts to your position, you not only gain the potential for greater upside if the stock exceeds your short strike, but you also continue to generate income through premium selling. The additional LEAPS effectively increase your deltas, which means you have a larger exposure to the stock's price movement, giving you more leverage if the stock moves in your favor. This enhanced delta position allows you to capture more of the stock’s upside while still benefiting from consistent income. I’ll explore the mechanics of how this works and how the changes in delta impact your strategy in more detail in an upcoming post.

The best part is that you can continue to sell calls against your LEAPS for months — even up to 12 months or longer. The poor man’s covered call provides all the benefits of a covered call strategy but with significantly less capital commitment.

Why Consider a Poor Man’s Covered Call?

The poor man’s covered call is ideal for investors who:

• Want to maximize their return on capital without committing large sums of money to buy stock.

• Are looking to generate consistent income while holding long-term positions.

• Want to diversify their portfolio with lower capital requirements.

By using LEAPS as a stock replacement, you can continue to sell calls for income generation or to further reduce your cost basis over time, without tying up excessive amounts of capital.

Final Thoughts

The poor man’s covered call strategy is an excellent tool for those looking to leverage the benefits of a covered call while saving significant capital. Whether you’re new to options or an experienced trader, it offers a compelling alternative to traditional methods. The strategy’s potential for higher returns with lower risk makes it a versatile approach in a range of market conditions.

Remember, like all options strategies, the poor man’s covered call requires careful planning, discipline, and an understanding of market movements. But with the right strategy in place, it can serve as a valuable addition to your investment toolkit.

For a deeper dive on poor man’s covered calls check out my featured report, “Poor Man’s Covered Calls Explained: A Smart Strategy for Today’s Market.”

Let the probabilities work in your favor,

Andy Crowder

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