How to Choose the Right LEAPS Strike for a Poor Man's Covered Call

The takeaway: The LEAPS strike you pick is the single most important decision in a Poor Man's Covered Call, and almost no one treats it that way. Deeper strikes around 0.80 to 0.85 delta act most like stock and cost the most. Lighter strikes around 0.65 to 0.74 delta cost less but bring more leverage and more sensitivity to short-term moves. The working default for most setups is the middle of the range, around 0.75 delta with 18 to 24 months to expiration. Get the strike right and the rest of the trade becomes routine. Get it wrong and you will spend the next two years subtly fighting your own entry.

Show me a trader who has just learned the Poor Man's Covered Call and I will show you someone about to make the strike-selection decision badly.

It is not their fault. They have read the same articles everyone else has read. They understand the structure. Buy a long-dated, deep-in-the-money call. Sell shorter-dated calls against it for income. They have seen the capital savings illustrated, often dramatically. What they have not been given is a framework for the one decision that matters most. They are about to pick a LEAPS strike the way a tourist picks a wine off a list, by browsing the descriptions until something feels reasonable.

The browsing approach is exactly how most strike-selection decisions get made. It is also why most PMCC traders end up subtly fighting their own entries for the entire life of the position.

After more than two decades of trading options professionally, I will tell you what I tell every subscriber who asks me about the PMCC. The strategy is excellent. The structure is robust. The execution rests on a single decision you make at the moment of entry. That decision is which LEAPS strike to buy. Get it right and you have set yourself up to manage the trade cleanly through cycles, rolls, and market shifts. Get it wrong and every other decision in the trade gets harder.

This article is about making that decision deliberately.

What Is a Poor Man's Covered Call?

A Poor Man's Covered Call is a way to run a covered call strategy without owning the underlying stock. Instead of buying 100 shares, you buy a long-dated call option that acts as a stand-in for the shares. Then you sell shorter-dated calls against the long position to bring in income, the same way a covered call does. The structure is technically a diagonal debit spread. The intuition is simpler: substitute the cheap thing for the expensive thing and let the income engine run on top.

The "poor man" part of the name refers to the capital savings. A covered call on 100 shares of SPY at $590 ties up about $59,000. A PMCC built around a deep-in-the-money LEAPS can be opened for around $12,000, depending on the strike you choose. Same income engine on top. A fifth of the capital underneath. The math is the entire appeal.

The trade is not free. You give up dividends. The LEAPS price moves with implied volatility in a way stock does not. You have to roll the LEAPS forward eventually, and rolling has friction. And the long leg, the single LEAPS contract sitting at the foundation of the entire position, has to be chosen carefully, because it sets the profile of everything that follows.

That last point is what this article is about.

Why Does Strike Selection Matter So Much?

When you buy a LEAPS to use in a PMCC, you are not just buying stock exposure on the cheap. You are buying a specific blend of three things at once, and the proportions are set by the strike.

The first is delta. How closely does the LEAPS move with the underlying? A 0.80 delta means the LEAPS gains roughly 80 cents for every dollar the stock rises. A 0.70 delta gains about 70 cents on the same move. Choosing a deeper strike gives you more delta and more stock-like behavior. A lighter strike gives you less of both.

The second is capital. Deeper strikes cost more in absolute dollars because they have more intrinsic value baked in. A 0.80 delta SPY LEAPS might cost around $12,000. A 0.70 delta on the same expiration might cost around $8,000. The four thousand dollar difference looks small in isolation. It is not small. It determines how many positions you can size, how diversified your book is, and how much capital you have left for everything else.

The third is what happens when things go wrong. A deeper LEAPS has more cushion. If the stock drops, you lose value, but less of it in percentage terms. A lighter LEAPS has less cushion. The same drop hurts more. This is the part of the trade-off most traders discover only when they need it, which is the worst possible time to discover it.

The strike sets your delta, your cost, your downside cushion, your gamma exposure, and the ease with which you will be able to manage the position over the next twelve to twenty-four months. No other variable in the trade touches as many outcomes at once. Pick well and the rest of the trade is routine. Pick poorly and you fight the entry decision every month for two years.

The Three Strike Zones

Most PMCC traders work in one of three strike zones. Each zone produces a meaningfully different trade.

Deep in-the-money, 0.80 to 0.85 delta. This is the most stock-like setup. The LEAPS tracks the underlying closely. The profit-and-loss curve is smoothest. The cushion if the stock pulls back is the largest of the three. You pay the most up front in absolute dollars. You also worry the least once the position is on. Practitioners running PMCCs as long-term core holdings tend to live here. The position behaves the way owning stock would behave, just with less capital occupying the slot.

Moderately in-the-money, 0.75 to 0.80 delta. This is the working default for most PMCC traders, and the zone I recommend for most setups. You give up some cushion compared to going deeper. In return you save 15 to 20 percent on the capital outlay. The position still moves closely with the underlying, with enough flexibility to manage the trade actively without paying for cushion you may never use. If you cannot decide which zone is right for your situation, this is the zone to choose. The middle is the middle for a reason.

Light in-the-money, 0.65 to 0.74 delta. This is the cheapest entry of the three. It is also the most leveraged in functional terms. The LEAPS moves less closely with the stock, and small moves in the underlying produce larger percentage moves in the LEAPS price. Leverage is not a problem when conditions cooperate. Leverage is a particular kind of problem when they stop, because the same nonlinearity that helped you on the way up will hurt you on the way down. Light ITM strikes are appropriate for tactical positions, shorter holding periods, or smaller accounts where capital efficiency genuinely matters. They are not appropriate for traders who chose them only because they were cheap.

SPY Walkthrough: How the Three Strikes Compare

Numbers make this concrete. Assume SPY is trading around $590 and we are looking at January 2028 LEAPS, roughly 19 months out.

A deep-in-the-money LEAPS at the $505 strike, about 0.80 delta, costs around $12,000 per contract. It tracks SPY closely and gives you about $85 of downside cushion before the LEAPS starts losing intrinsic value.

A moderately in-the-money LEAPS at the $530 strike, about 0.75 delta, costs around $10,000. It captures most of SPY's movement with slightly more sensitivity to volatility. The cushion before intrinsic value erodes is about $60.

A light in-the-money LEAPS at the $555 strike, about 0.70 delta, costs around $8,000. It tracks less closely and carries meaningfully more sensitivity to volatility and gamma. The cushion is about $35.

Now layer the income leg on top. Sell a 30 to 45 day call out of the money, say a $605 strike for about $7 per share or $700 per contract. That income arrives regardless of which LEAPS you chose. So $700 of monthly premium against a $12,000 LEAPS is roughly 5.8 percent monthly return on capital tied up. Against a $10,000 LEAPS, roughly 7.0 percent. Against an $8,000 LEAPS, roughly 8.7 percent.

Look at those numbers and the cheaper strike looks like the obvious winner. It is not. The ratio is the part of the math that pulls you toward yield. The cushion column is the part that tells you the risk you are carrying. The math always points toward cheaper. The risk profile is what tells you not to chase it.

This is the moment most strike selections go wrong. The trader sees the higher percentage return on the lighter strike and reasons that the lower capital outlay means lower risk. The lower capital outlay does mean lower notional dollars at risk per contract. It does not mean lower risk per dollar of exposure. Those are different statements, and they are routinely confused.

Which Strike Fits Your Goal?

The right strike depends on four questions about how you intend to run the trade.

How long do you plan to hold the position? Longer holding periods favor deeper strikes, because deeper strikes have more time premium amortizing over your holding period and lower per-month theta drag. Shorter holding periods can tolerate lighter strikes, because you exit before the gamma exposure has time to find you.

How much capital are you committing to this single position? If the position will be three to four percent of your portfolio, you have room to use a deeper strike without crowding your other allocations. If you are running a small account or building a diversified book of PMCCs, lighter strikes let you spread capital across more positions. The capital question is not really about the strike. It is about how many positions you can run and how much variance you can tolerate per position.

Are you running a concentrated book or a diversified one? Concentration favors deeper strikes because the position carries more weight in the portfolio and you want stability. Diversification favors moderate to lighter strikes because you have other positions absorbing variance.

Do you want a smooth equity curve or are you willing to ride bigger swings? Deeper strikes give a smoother ride. Lighter strikes give larger swings in both directions. The honest answer to this question, for most traders, is "smoother than I think I want."

For most traders the answers point toward a moderate strike, 0.75 to 0.78 delta, 18 to 24 months out. That is the working default. Push deeper if your account profile or risk tolerance argues for it. Push lighter only when you have a specific reason and the capital math genuinely requires it. The deepest strikes belong on core holdings. The lightest strikes belong on tactical positions sized small. The middle belongs on almost everything else.

The Trade-Offs Most Articles Skip

Most strike-selection articles stop at "deeper for stability, lighter for leverage." That summary is correct and incomplete. Here is what gets buried in the typical coverage.

Bid-ask spreads on deep ITM LEAPS are wider than they look. A 0.85 delta LEAPS might quote with a $1 to $2 bid-ask spread. On a $120 premium, that is 1 to 2 percent slippage on entry and again on exit. For shorter-holding strategies, that slippage can eat a meaningful piece of the trade's edge. Sticking to ETFs and large-cap names with deep LEAPS volume mitigates the problem. It does not eliminate it. The trader who routinely accepts the offer rather than working the order is paying a tax most traders forget exists.

Gamma scales inversely with delta. A 0.70 delta LEAPS has roughly twice the gamma of a 0.85 delta LEAPS at the same expiration. Gamma is the curvature of the LEAPS price as the underlying moves, which means high-gamma LEAPS produce nonlinear price changes when the underlying moves at all. In practice this shows up as bigger percentage swings on light ITM strikes, even when the stock barely moves. The leverage you read about in the cost comparison is real. It is also gamma leverage as much as delta leverage. Gamma is the variety of leverage that catches you on small moves rather than large ones.

Volatility risk scales with premium. The more you pay for a LEAPS, the more dollars are exposed to changes in implied volatility. A deeper strike has more intrinsic value and less extrinsic, so volatility shifts the price less. A lighter strike has more extrinsic value, and a meaningful drop in implied volatility hurts it more. This is vega risk, the same risk that lives inside every LEAPS strategy. The strike you choose determines how much of it you are carrying.

Managing a PMCC over 18 to 24 months involves real decision fatigue. Every 30 to 45 days you face a choice on the short call: roll, let expire, defend, or accept assignment. Every six months or so you face a choice on the LEAPS: roll up, roll out, or hold. The deeper the LEAPS, the easier most of these decisions are, because you have more cushion. The lighter the LEAPS, the more often you face uncomfortable choices in the middle of the trade. Decision fatigue is not a cost that shows up on the P&L. It is a cost that shows up in the trader.

None of these invalidate the lighter-strike PMCC. They mean the leverage you get by going lighter comes with real costs that are not visible in the strike comparison table. Going in with eyes open is the entire difference between using leverage well and being used by it.

How I Build PMCC Portfolios in Practice

In the portfolios I run, including the Wealth Without Shares and All-Weather books, I lean heavily toward the 0.75 to 0.80 delta zone with 18 to 24 months to expiration. The reasons line up cleanly.

The cushion absorbs most pullbacks without forcing a defensive roll. The cost is low enough to build a diversified book without overcommitting capital to any single position. The position is not overly sensitive to daily moves, which reduces the emotional management cost and lets me focus on the structural decisions rather than the tactical ones. A 0.75 delta LEAPS with 18 months to expiration typically lets me sell 12 to 18 cycles of short calls before the LEAPS itself needs to be rolled. Each cycle gradually lowers the cost basis. The math compounds quietly.

I sometimes mix strikes across positions deliberately. Core holdings like SPY, QQQ, and AAPL go deeper, often at 0.80 to 0.85 delta. These are positions I plan to hold and roll for years, and stability matters more than capital savings. Income workhorses in IWM, DIA, and broad sector ETFs sit at the standard 0.75 delta. Tactical positions or sector-rotation names use 0.70 to 0.72 delta, sized smaller because the leverage profile demands smaller sizing.

The mix creates a natural risk ladder across the portfolio. Most of the capital sits in stable, deeper-strike positions. A smaller fraction sits in tactical, lighter-strike positions where the leverage adds optionality without endangering the broader book. The structure is the opposite of "everything in the highest-yielding strike." That structure is what makes the strategy survive markets the trader did not predict.

Key Takeaways

The LEAPS strike you choose is the foundation of every PMCC trade. It sets your delta, your cost, your downside cushion, and how the position will behave over the next 12 to 24 months. Nothing else in the trade has the same reach.

Three strike zones cover most use cases. Deep in-the-money around 0.80 to 0.85 delta gives the most stock-like behavior at the highest cost. Moderate in-the-money around 0.75 to 0.80 delta is the working default. Light in-the-money around 0.65 to 0.74 delta is the cheapest entry but carries more gamma and more sensitivity to volatility.

For most traders most of the time, 0.75 delta with 18 to 24 months to expiration is the right default. It balances cost, exposure, cushion, and management flexibility. Push deeper for core holdings or smaller risk tolerances. Push lighter only when you have a specific reason and the capital constraint is genuine.

Mixing strikes across a portfolio is a legitimate approach. Deeper for core positions. Moderate for income workhorses. Lighter for tactical positions sized accordingly. The ladder spreads risk and lets each position do what its strike profile is best at.

Strike selection is one of the rare decisions in trading where the work happens entirely at the moment of entry, before the trade has done anything. Most of trading is reactive. This is one of the few moments that is structural. Treat it accordingly.

Frequently Asked Questions

What delta should I look for when buying the LEAPS for a Poor Man's Covered Call?

The working default is 0.75 to 0.80 delta with 18 to 24 months to expiration. That range gives you most of the stock-like behavior of a deeper strike, but with lower capital outlay and enough cushion to manage the position through normal pullbacks. Go deeper, around 0.80 to 0.85 delta, for core holdings where stability matters more than capital efficiency. Go lighter, around 0.65 to 0.74 delta, only when you have a specific reason and you accept the increased gamma and volatility sensitivity.

How much does the LEAPS strike actually affect my PMCC results?

Significantly more than most traders realize. The strike sets your delta, which determines how much of the underlying's movement you capture. It sets your cost, which determines how many positions you can size. It sets your gamma, which determines how nonlinear the position behaves on small moves. And it sets the cushion you have if the stock falls. Different strikes on the same underlying produce materially different trades, even though the short call leg looks identical.

Why not just always buy the cheapest LEAPS?

The cheapest LEAPS is usually the lightest in-the-money or sometimes at-the-money. Those strikes have less delta, more gamma, and more sensitivity to implied volatility. The math on monthly return on capital tied up looks attractive. The risk math goes the other way. Cheaper LEAPS have less cushion if the stock pulls back, amplify both gains and losses, and require more active management. Cheap on paper is not the same as cheap in practice.

Should I use the same LEAPS strike across my whole PMCC portfolio?

Not necessarily. Mixing strikes deliberately is a useful approach. Core positions you plan to hold long-term and roll repeatedly can use deeper strikes for stability. Workhorse income positions sit at the 0.75 delta default. Tactical positions in smaller sizes can use lighter strikes for capital efficiency. The mix creates a natural risk ladder across the book where each position's strike fits its role in the broader portfolio.

How long should my LEAPS have until expiration when I open the PMCC?

The standard target is 18 to 24 months to expiration. That gives you enough time premium that the per-month theta drag stays manageable, while still being short enough that you are not paying for time you do not need. Inside six months to expiration, theta acceleration starts eating real money, so plan to roll the LEAPS before it gets that close.

When should I roll the LEAPS up or out?

Roll up when the underlying has rallied significantly and your current LEAPS strike is now well in the money beyond where it was originally, or when your delta has drifted high enough that the trade is no longer using capital efficiently. Roll out when your time to expiration is approaching six months and the position is still working. Both rolls cost something in commissions and slippage, so do not roll for the sake of rolling. Roll when the math says the new structure is meaningfully better than the current one.

Strike selection is the most underdiscussed and most consequential decision in the Poor Man's Covered Call. It sets the foundation of the trade. Everything else, including how aggressively you can run the short call, how easily you can manage rolls, and how the position behaves through different market environments, depends on what you put in that long-leg slot.

The default is 0.75 delta, 18 to 24 months out. Push deeper for stability and core holdings. Push lighter only when capital constraints actually require it. Mix strikes across the portfolio when the book has different jobs to do.

You can always roll a LEAPS up or out as the trade develops. You cannot undo a poor entry strike. The strike is one of the few decisions in trading that is genuinely structural rather than reactive. Make it count.

Want to keep building the framework? Start with the position sizing rules that anchor every PMCC trade. Review the LEAPS-based hedged equity framework for the broader case for using LEAPS as stock replacements across a portfolio. For the income leg discipline, the Wheel Strategy mechanics walk through the same short-call decisions in a different structural context.

For the contract specifications on LEAPS directly from the exchange, see the CBOE LEAPS reference.

Probabilities over predictions,

Andy Crowder

📚 Related Reading: Poor Man’s Covered Calls: The Definitive Guide

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