The Poor Man’s Covered Call on SPY: A Smarter Way to Generate Income with Less Capital

Making consistent income from the stock market is every trader’s goal. Covered calls have been a tried-and-true strategy for years, allowing investors to earn passive income while holding stocks. But there’s one major drawback—capital requirements.

Buying 100 shares of SPY means committing over $60,000 to a single trade. That’s where the Poor Man’s Covered Call (PMCC) comes in—a lower-cost alternative that mimics covered calls while freeing up capital for other trades.

But before you jump in, understand this: PMCCs aren’t risk-free—they involve trade-offs. This guide will break down how the strategy works, its risks, and how to execute it profitably.

What Is a Poor Man’s Covered Call?

A PMCC is a capital-efficient version of a covered call, replacing stock ownership with a long-term call option known as a LEAPS contract.

Traditional Covered Call vs. PMCC on SPY

A PMCC gives you the same income potential as a covered call—but with significantly less money at risk.

How to Set Up a Poor Man’s Covered Call on SPY

With SPY trading for roughly $600.

Step 1: Buy a Deep ITM LEAPS Call

✔ Choose a LEAPS contract (1.5 to 2 years until expiration).
✔ Pick a strike price with 80+ Delta (meaning it moves almost like stock ownership).
✔ Example: Buy SPY January 2027 $505 Call (~$14,800 cost).
✔ This LEAPS call mimics owning 100 shares of SPY but costs significantly less.

Step 2: Sell a Short-Term Call for Income

✔ Sell a near-term out-of-the-money (OTM) call (20–45 days to expiration).
✔ Aim for 20–30 Delta—this balances risk and reward.
✔ Example: Sell SPY March 2025 $626 Call for $2.84 per contract.
✔ This trade generates ~2% every 35 days—or 24% annually, before potential capital gains on the LEAPS.

Why SPY? Understanding the Market’s Strength

SPY is the most liquid ETF, making it ideal for options strategies. But does this strategy work across all market conditions?

Let’s look at SPY’s historical performance over the past 10 years:

How Does This Affect a PMCC?

✔ Bull Markets (2019, 2020, 2021, 2023, 2024): The PMCC thrives, generating steady premium income.
✔ Bear Markets (2018, 2022): LEAPS lose value, requiring risk management strategies.

Bottom line: A PMCC works best in flat to bullish markets but requires active management during downturns.

The Risk vs. Reward of a PMCC on SPY

✅ Benefits of a PMCC

✔ Lower Capital Requirement – Control 100 SPY shares for ~30% of the cost.
✔ Higher Return on Capital – Selling calls against a lower-cost position boosts ROI.
✔ Steady Income Potential – Collect premiums every 30-45 days.
✔ Diversification – SPY tracks the S&P 500, reducing single-stock risk.

❌ Risks of a PMCC

⚠ Theta Decay on LEAPS – If SPY stagnates, the LEAPS loses value over time.
⚠ Short Call Assignment Risk – If SPY spikes above the short call strike, rolling the position is necessary.
⚠ No Dividends – Unlike stockholders, PMCC traders don’t receive SPY’s quarterly dividend.
⚠ IV Crush (Implied Volatility Drop) – If IV falls, the LEAPS loses value even if SPY stays flat.

Is a PMCC on SPY Worth It?

A Poor Man’s Covered Call on SPY is a powerful, capital-efficient strategy that allows traders to generate consistent income with lower upfront costs. However, it’s not a passive strategy—it requires rolling short calls and managing risk.

Ask Yourself Before Using This Strategy:

✅ Do I want passive income with less capital at risk?
✅ Am I comfortable managing short call rolls?
✅ Do I understand how volatility affects options pricing?

If the answer is YES, then a PMCC on SPY might be the best strategy you’ve never used.

Key Takeaways:

✔ SPY has delivered strong long-term returns but carries volatility risks.
✔ A PMCC on SPY mimics a covered call with less capital required.
✔ Buying LEAPS when IV is low and selling calls when IV is high optimizes results.
✔ Diversifying across ETFs can reduce single-market exposure.

Trade wisely—because the biggest risk in options trading is assuming there isn’t one,

Andy

Want to learn more about how poor man’s covered calls work?  Poor Man’s Covered Calls Explained: A Smart Strategy for Today’s Market

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