What Is a Poor Man’s Covered Call?

Imagine you want to rent out a beach house to earn steady monthly income, but buying that beach house costs $500,000.

What if you could rent out the rights to use that house without paying the full half-million? You’d still collect monthly rent, but you’d only have to pay a fraction of the price to get started.

That’s essentially what a Poor Man’s Covered Call does for stocks. It’s a clever options strategy that lets you collect income from a stock without owning it outright, by renting out the “rights” to it, at a much lower cost.

Breaking Down the Name

The name sounds a little silly, but it makes sense:

• Covered Call - A strategy where you own a stock and sell call options against it to collect income.

• Poor Man’s - A version that costs much less because you don’t buy the stock itself. Instead, you buy a long-term call option (LEAPS) that acts like the stock.

The “poor” part isn’t about being broke. It’s about being smart with your capital. You’re spending less to get a very similar result.

Step-by-Step: How It Works

Here’s the basic blueprint:

1. Buy a Long-Term Call (LEAPS)

   • This is your stock substitute.

   • It’s deep in-the-money (strike price far below the current stock price).

   • Expiration is usually 1-2 years away, so it behaves a lot like owning the stock.

2. Sell a Short-Term Call Against It

   • This is the “covered call” part.

   • You sell an out-of-the-money call that expires in about 30-45 days.

   • You collect premium (income) upfront.

3. Repeat Every Month or Two

   • As your short calls expire, you sell new ones.

   • This creates a steady flow of income, much like monthly rent checks.

A Simple Example

Let’s say you want to run this strategy on a Mag 7 like Microsoft (MSFT), which is trading at $520.

Covered Call Version:

• Buy 100 shares at $520 = $52,000 investment.

• Sell a 1-month $540 call for $590 in premium, for a return on premium of 1.1% over 41 days.

Poor Man’s Covered Call Version:

• Buy a Jan 2027 $450 LEAPS call for $11,700 (controls 100 shares).

• Sell the same 1-month $540 call for $590 in premium, for a return on options premium of 5.0% over 41 days.

Result: You control the same 100 shares for about one-third of the cost and still collect the same $590 income for the month.

Why This Works

Think of the LEAPS as a long-term lease on a house and the short calls you sell as Airbnb rentals.

• You’ve locked in the right to “use” the stock for a long period (via LEAPS).

• You rent out short-term rights (short calls) for income.

• You never had to buy the full property (the stock) to begin with.

The Benefits

1. Lower Cost - You don’t tie up tens of thousands of dollars.

2. Lower Risk - Your maximum loss is the cost of the LEAPS, not the full stock value.

3. Income Potential - You can still generate steady income each month.

4. More Flexibility - With less money in one trade, you can diversify.

The Risks

Even beginner-friendly strategies have risks:

• Stock Drops - Your LEAPS will lose value if the stock falls.

• Time Decay - LEAPS lose value slowly over time, but it still happens.

• Volatility Changes - A drop in implied volatility can lower the price of your LEAPS and your short calls.

The key is to keep position sizes reasonable and not treat the lower cost as a license to overtrade.

How to Pick the Right LEAPS

A simple beginner’s rule:

• Delta: Aim for about 0.80-0.85 delta.

  • This means your LEAPS will move almost like the stock (80-85% of its movement).

• Expiration: 1-2 years out.

• Strike Price: Deep in-the-money, so most of what you’re paying is intrinsic value, not time value.

How to Pick the Right Short Call to Sell

• Choose a strike above the current stock price (out-of-the-money).

• Pick an expiration 30-45 days away.

• Look for a call that gives you at least 1-2% of your LEAPS cost in premium each month.

A Month in the Life of a PMCC

1. Day 1: Buy LEAPS, sell short call, collect premium.

2. Day 30: Short call expires worthless, you keep the premium.

3. Day 31: Sell a new short call for next month.

4. Repeat the cycle.

Over time, these premiums help reduce your LEAPS cost — and can even turn the trade into a “free” position.

The Takeaway

A Poor Man’s Covered Call is a cost-efficient twist on a classic strategy. Instead of spending a fortune on 100 shares, you use a LEAPS contract as a stand-in. From there, you sell calls against it to generate steady income.

For beginners, it’s one of the most accessible ways to get into options income trading without overcommitting capital, but it still requires discipline, risk awareness, and smart position sizing.

Probabilities over predictions,

Andy Crowder

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