The All-Weather Portfolio with Poor Man’s Covered Calls: A Tactical Approach to Consistent Income

Over the past several weeks, I’ve detailed several income strategies that play a pivotal role in my portfolio—namely, covered calls and poor man’s covered calls. Today, we’re going to dive deep into the mechanics of constructing a portfolio centered around poor man’s covered calls, using a risk-parity framework inspired by Ray Dalio’s All-Weather Portfolio. This is my preferred way to use the poor man’s covered call strategy.

Why the Poor Man’s Covered Call Strategy?

A poor man’s covered call (PMCC) offers a capital-efficient way to generate income while maintaining exposure to underlying assets. Unlike a traditional covered call, which requires the outright purchase of shares, PMCCs use long-term options (LEAPS) as a stock substitute, dramatically reducing capital requirements.

By implementing this strategy across a diversified portfolio, I can increase capital efficiency while generating consistent premium income. This approach allows for broader diversification across multiple strategies, such as:

• All-Weather Portfolio

• Dogs of the Dow

• Growth/Value Portfolio

• Yale Endowment Portfolio

• Earnings Yield Portfolio

However, the foundation of my strategy is the All-Weather Portfolio, which I’ll break down in detail.

The All-Weather Portfolio: A Timeless, Resilient Approach

Ray Dalio’s All-Weather Portfolio is designed to perform well across all market conditions by balancing risk across different asset classes. The original allocation is:

• 40% Long-term Treasuries

• 20% U.S. Stocks

• 10% International Stocks

• 15% Intermediate-term Treasuries

• 5% Commodities (Diversified)

• 5% Gold

For my PMCC adaptation, I need to ensure that each asset class is represented by an ETF with a deep and liquid options market, offering LEAPS with at least two years to expiration.

Selecting the Right ETFs

Finding the right ETFs for this strategy isn’t as straightforward as selecting index funds. We need options liquidity and the ability to execute trades efficiently. Here’s my adapted allocation:

• iShares 20+ Year Treasury Bond ETF (TLT) – 40%

• SPDR S&P 500 ETF (SPY) – 20%

• iShares MSCI EAFE ETF (EFA) – 10%

• SPDR Gold Shares ETF (GLD) – 5%

With these ETFs, I gain access to highly liquid options markets, allowing me to establish LEAPS positions and continuously sell shorter-term calls.

Constructing a Poor Man’s Covered Call on TLT

Step 1: Buying the LEAPS Call

The iShares 20+ Year Treasury Bond ETF (TLT) is currently trading at $88.21. To initiate a PMCC, I look for a LEAPS call with a delta of around 0.80, which ensures sufficient leverage while maintaining a strong correlation with the underlying stock.

• Selected LEAPS Contract: January 15, 2027, 75-strike call

• Delta: 0.81

• Days to Expiration: 694

• Cost per Contract: ~$15.45 ($1,545 per contract, compared to $8,821 for 100 SPY shares)

This approach saves approximately 82.5% of the capital required for a traditional covered call, allowing for greater portfolio diversification.

Step 2: Selling the Short-Term Call

Once I establish the LEAPS position, I sell a short-term call to generate income. I typically select an option with 30-60 days to expiration and a delta between 0.20 and 0.40, ensuring a high probability of success (60-85%).

• Selected Short Call: TLT 91.5 strike expiring in 43 days

• Delta: 0.23

• Premium Collected: $0.53 per contract

This reduces my net cost to $14.92 ($1,492 total cost), and the premium received represents a 3.4% return over 43 days (or 27.2% annualized). While this is a conservative estimate, it does not account for potential appreciation in the LEAPS position, which further enhances returns if TLT trends higher.

Managing the Trade

If TLT moves higher, the delta of my LEAPS position increases, improving the overall profitability. If the short call moves in the money, I manage the position by rolling it forward or buying it back and selling a new one at a higher strike.

Scaling the Strategy Across the Portfolio

Using the same methodology, I establish PMCCs on SPY, EFA, and GLD. Each trade follows the same structured process:

1. Buy LEAPS with at least two years to expiration (targeting a delta ~0.80)

2. Sell short-term calls with 30-60 days to expiration (targeting a delta of 0.20-0.40)

3. Collect premium monthly to reduce cost basis and generate income

4. Manage the position by rolling calls and adjusting strikes as needed

Performance Expectations and Risk Management

Historically, this approach has outperformed major indices by 3-5x, primarily due to:

• High capital efficiency (reducing the need for full stock ownership)

• Consistent income generation through call selling

• Risk mitigation through diversification

Key Risks and Adjustments:

• If implied volatility (IV) collapses, premium collection will decline, requiring adjustments.

• If an ETF rallies sharply, particularly early in the trade,

• rolling the short call becomes necessary to maintain risk/reward balance.

• If the underlying ETF declines significantly, the LEAPS position may need to be managed to avoid excessive decay.

Final Thoughts

By leveraging a risk-parity framework with poor man’s covered calls, investors can achieve consistent income while minimizing capital outlay. The All-Weather Portfolio, when executed with PMCCs, provides a resilient, high-probability approach to long-term wealth accumulation.

Next week, I’ll break down delta, theta, and gamma and how they impact PMCCs over time. Stay tuned!

Andy Crowder

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