The Poor Man's Covered Call: A Capital-Efficient Options Strategy for Income Investors - How to Choose the Right Strike Prices

Introduction: The Capital Efficiency Problem

Imagine you want to generate income from your stock portfolio, but you don't have $66,304 to buy 100 shares of an S&P 500 ETF. Or maybe you do have the capital, but you'd rather not tie up that much money in a single position. This is where the Poor Man's Covered Call (PMCC) becomes a game-changer.

The Poor Man's Covered Call, also known as a long call diagonal debit spread, is one of the most powerful capital-efficient strategies available to options traders. It allows you to replicate the income-generating potential of a traditional covered call while using only 20-30% of the capital required to own the actual shares.

Understanding the Foundation: What is a Covered Call?

Before we dive into the Poor Man's Covered Call, let's make sure we understand the traditional covered call strategy.

Traditional Covered Call Strategy:

• You own 100 shares of a stock (for example, SPY trading at $663)

• Capital required: $66,300 (100 shares × $663)

• You sell a call option against those shares to collect premium income

• If you sell a 30-day call for $580 ($5.80 × 100), you pocket that income

• Your monthly income: $580 or about 0.9% return on capital

The covered call is popular because it generates consistent income, but the problem is obvious: it requires massive capital. To run covered calls on just 5 different stocks, you might need $200,000 or more.

The Solution: Poor Man's Covered Call

The Poor Man's Covered Call solves the capital problem by replacing the 100 shares with a LEAPS call option that behaves very similarly to owning shares, but costs a fraction of the price.

What Are LEAPS?

LEAPS stands for Long-Term Equity Anticipation Securities. These are simply call options with at least one year (365 days) until expiration. Think of them as "stock substitutes" that give you long-term exposure to a stock's upside movement.

The beauty of LEAPS is that they capture most of the stock's price movement without requiring you to buy the actual shares.

How the Strategy Works: Step-by-Step Breakdown

Let's use SPY (trading at $663) as our example and build a Poor Man's Covered Call from the ground up.

Step 1: Buy a LEAPS Call Option (Your Stock Substitute)

Instead of buying 100 shares of SPY for $66,300, you buy a deep in-the-money LEAPS call option.

Example: December 18, 2026 Expiration (430 days out)

• Strike Price: $550

• Cost: $14,900 ($149 × 100 multiplier)

• Delta: 0.80

What This Means:

• You control the equivalent of about 80 shares of SPY (because of the 0.80 delta)

• You paid only $14,900 instead of $66,300 (that's 77.5% less capital!)

• For every $1 SPY moves up, your LEAPS gains approximately $0.80 in value

Step 2: Sell Short-Term Call Options Against Your LEAPS

Just like in a traditional covered call, you now sell shorter-term call options to collect premium income.

Example: November 14, 2025 677 Call (31 days out)

• Strike Price: $677 (above current price)

• Premium Collected: $580 ($5.80 × 100)

• Return: 3.9% (this is your income for the month)

Step 3: Repeat Monthly

Every month, after the short call expires, you sell another 30-60 day call option and collect more premium. This ongoing income collection is what makes the strategy powerful.

Understanding Delta: Your "Share Equivalent"

Delta is the most important concept to understand for this strategy. Think of delta as the percentage of stock movement your option captures.

Delta Examples:

• Delta of 0.80 = Your option moves like you own 80 shares

• Delta of 0.75 = Your option moves like you own 75 shares

• Delta of 0.50 = Your option moves like you own 50 shares

For Poor Man's Covered Calls, I target a delta between 0.70 and 0.85 on their LEAPS purchase. This gives me enough stock-like exposure while keeping costs reasonable.

Why Not Just Buy 1.00 Delta? A delta of 1.00 would be a LEAPS so deep in-the-money that it costs almost as much as the stock itself, defeating our capital efficiency goal!

Comparing Your Options: Which LEAPS Should You Buy?

This is the critical decision. Let's compare three different approaches using SPY at $663:

Option 1: Shorter-Term LEAPS (430 Days)

December 18, 2026 - $550 Strike - 0.80 Delta

• Cost: $14,900

• Time to expiration: 430 days

• Probability of staying in-the-money: 71.9%

Pros:

• Lowest capital requirement

• Can diversify into more positions

• Good for shorter holding periods (1-3 months)

Cons:

• Less time to recover if trade moves against you

• More frequent position management needed

• Time decay starts affecting you sooner

Option 2: Longer-Term LEAPS (794 Days)

December 17, 2027 - $540 Strike - 0.80 Delta

• Cost: $17,960

• Time to expiration: 794 days

• Probability of staying in-the-money: 69.8%

Pros:

• Maximum time cushion

• Best for "set and forget" positions

• Can weather significant pullbacks

• Lowest stress level

Cons:

• Highest capital requirement (still 73% less than buying shares!)

• Paying maximum time premium

The Strike Price vs. Delta Decision

Here's another key choice: Do you pick your LEAPS by delta or by strike price?

Delta Approach (Preference):

• Choose a consistent delta (0.75-0.80) regardless of strike

• Provides similar stock-like behavior across different expirations

• Easier to compare apples-to-apples

Strike Price Approach:

• Pick the same strike across different expirations

• Results in different deltas for each expiration

• Can be useful for specific price level strategies

Capital Efficiency: The Real Power

Let's illustrate the dramatic capital advantage:

Traditional Covered Call Portfolio (1 contracts):

• 100 shares × $663 × 1 = $66,300 capital required

Poor Man's Covered Call Portfolio (1 contracts):

• 1 LEAPS × $17,960 × 1 = $17,960 capital required

Capital Savings: $48,340 (73% less capital tied up)

With the same $66,300, you could run Poor Man's Covered Calls on:

• Numerous positions instead of 1

• Vastly better diversification

• Similar or better income generation

Risk Management and What Can Go Wrong

No strategy is without risk. Here are the main risks and how to manage them:

Risk 1: The Stock Drops Significantly

Scenario: SPY drops from $663 to $610 (8% decline)

What Happens:

• Your LEAPS loses value

• Your short call expires worthless (you keep the premium)

Management:

• The premium you collect provides a cushion

• You have time (upwards of 12 to 18 months) for the stock to recover

• You can continue selling calls to lower your cost basis

• If SPY drops below your LEAPS strike ($540), you start losing more quickly

Risk 2: The Stock Rallies Hard and Your Short Call Gets Assigned

Scenario: SPY rallies to $685

What Happens:

• Your short $677 call is now in-the-money

• If assigned, you'd need to deliver 100 shares

Management:

• Roll your short call to a higher strike or later expiration before assignment

• Close both legs and take your profit

• *Most traders never let this happen because they manage the position actively

Risk 3: Time Decay on Your LEAPS

What Happens:

• As your LEAPS approaches expiration, time decay accelerates

• In the last 6 months, decay becomes significant

Management:

• Plan to close or roll your LEAPS position with 6-12 months remaining

• Use the income collected to offset decay

• Consider this part of the strategy's cost

When to Use This Strategy

Ideal Conditions:

• You're bullish to neutral on a stock/ETF

• You want to generate consistent income

• You have limited capital but want exposure to multiple positions

• You're comfortable managing positions monthly

• The underlying has liquid options (tight bid-ask spreads)

Not Ideal When:

• You expect a massive rally and want unlimited upside

• You expect a severe crash (better to just sell puts or go to cash)

• You're trading illiquid stocks with wide option spreads

• You can't monitor positions at least monthly

Choosing Your Holding Period Strategy

Short-Term Approach (1-3 Months)

Best LEAPS: 365-575 days to expiration Why: Lower capital requirement, can move between positions quickly Best For: Active traders, tactical positions, testing the strategy

Medium-Term Approach (6-12 Months)

Best LEAPS: 575-730 days to expiration Why: Good balance of cost and time cushion Best For: Most traders, diversified income portfolios

Long-Term Approach (12-24 Months)

Best LEAPS: 2+ years to expiration
 Why: Maximum peace of mind, best recovery time, true "set and forget" Best For: Patient investors, retirement accounts, building consistent systems

Common Mistakes to Avoid

Mistake 1: Buying Too Short of LEAPS

Don't buy LEAPS with less than 12 months remaining to "save money." You'll just create more stress and limit your recovery time.

Mistake 2: Selling Calls Too Close to the Money

Give your position room to breathe. Selling calls with a 0.20 to 0.30 delta typically provides a good balance of premium and upside potential.

Mistake 3: Ignoring Your Position

Set calendar reminders. Check your short calls weekly, especially in the last week before expiration.

Mistake 4: Buying Low Delta LEAPS

A delta below 0.70 means you're not getting enough stock-like exposure. You'll collect premium, but your LEAPS won't keep up with the stock's gains.

Mistake 5: Using This Strategy in High Volatility Stocks

Try to keep the majority of positions to major ETFs (SPY, QQQ, IWM) or stable blue-chip stocks. Wild price swings make this strategy much harder to manage.

Exit Strategies

Know your exits before you enter:

Winning Exit:

• You've collected 40-50% of your LEAPS cost in premium

• Close the entire position and take your profit

• Typical timeline: 6-12 months

Rolling Exit:

• 6-9 months before LEAPS expiration

• Close current position

• Open a new LEAPS further out in time

• Continue the cycle

Losing Exit:

• Stock has moved significantly against you (15%+ drop)

• Your LEAPS has lost 30-40% of value

• Premium collection isn't keeping pace

• Close the position, take the loss, move on

Advanced Tips

1. Use 30-45 day short calls - This is the "sweet spot" for time decay

2. Target 0.30 delta on your short calls - Roughly 70% probability of expiring worthless

3. Collect at least 2% per month (preferably more) - Your goal should be to collect at least 2% of your LEAPS cost monthly

4. Track your all-in cost - Subtract every premium collected from your original cost to know your true breakeven

Final Thoughts

The Poor Man's Covered Call strategy offers an elegant solution to the capital problem in income investing. By using LEAPS as a stock substitute, you can generate 3-5× better returns on capital compared to traditional covered calls.

The strategy isn't about getting rich quick. It's about consistent, repeatable income generation with dramatically better capital efficiency. Whether you choose shorter-term LEAPS for flexibility or longer-term LEAPS for peace of mind, the key is matching the strategy to your goals and risk tolerance.

Start small, perhaps with just one position, and get comfortable with the mechanics before scaling up. The flexibility and control this strategy offers is what makes options such powerful tools for informed investors.

Key Takeaways:

• Requires 70-80% less capital than traditional covered calls

• Target 0.75-0.85 delta on LEAPS purchases

• Sell 30-45 day calls consistently to collect premium

• Choose LEAPS duration based on your holding period goals

• Manage risk actively and know your exit points

• Expect 3-5× better return on capital versus owning shares

Probabilities over predictions,

Andy Crowder

🎯 Ready to Elevate Your Options Trading?
Subscribe to The Option Premium, a free weekly newsletter delivering:
✅ Actionable strategies.
✅ Step-by-step trade breakdowns.
✅ Market insights for all conditions (bullish, bearish, or neutral).

📩 Get smarter, more confident trading insights delivered to your inbox every week.

📺 Follow Me on YouTube:
🎥 Explore in-depth tutorials, trade setups, and exclusive content to sharpen your skills.

📘 Join the conversation on Facebook.