What Is the Poor Man’s Covered Call?
Imagine you want to make money by renting out a stock you would like to own, but buying that stock is really expensive. The “Poor Man’s Covered Call” is a cheaper way to do that.
How It Works (in simple terms):
- Buy a long-term call option (instead of buying the stock):
- This gives you the right to buy the stock later at a certain price.
- It’s much cheaper than buying the actual stock.
- Sell short-term call options against it:
- This is like “renting out” your call option.
- You get paid upfront (a premium), but if the stock goes too high, you might have to give up some profit.
Why It’s Called “Poor Man’s”:
A normal “covered call” requires you to actually own 100 shares of the stock, which can be costly (e.g., $10,000+). The Poor Man’s version uses options instead of buying the stock, so it’s much cheaper — more affordable for the “poor man.”
In a Nutshell:
It’s a cheaper way to generate income using options, similar to a covered call, but without needing to buy expensive stock.
Example:- Stock Chosen: ABC Corp
Let’s say ABC Corp’s stock is trading at $100 per share.
Step 1: Buy a Long-Term Call Option
- You buy a LEAPS call option (a long-term option) on ABC.
- Details:
- Strike price: $80 (means you can buy the stock at $80 anytime before expiration)
- Expiration: 1 year from now
- Cost (premium): $25 per share
- Total cost = $25 × 100 shares = $2,500
Now, you control 100 shares of ABC without spending $10,000 — you only spent $2,500.
Step 2: Sell a Short-Term Call Option (aka “rent it out”)
- Sell a monthly call option against ABC.
- Details:
- Strike price: $105
- Expiration: 1 month from now
- Premium received: $2 per share
- Total income = $2 × 100 = $200
You’ve now made $200 in income. You can repeat this every month.
What Can Happen?
| Scenario | Stock Price | What Happens? | Result |
|---|---|---|---|
| 📉 Drops or stays flat | $90 or less | The short call expires worthless. You keep the $200. | Small gain |
| 📈 Rises slightly | $102 | Same — short call expires worthless. You keep the $200. | Gain |
| 🚀 Shoots above $105 | $110 | You may have to sell at $105 (your short call is exercised), limiting profit. But you still profit. | Capped gain |
Summary:
| Traditional Covered Call | Poor Man’s Covered Call |
|---|---|
| Buy 100 shares ($10,000) | Buy LEAPS call ($2,500) |
| Sell short call | Sell short call |
| Higher cost | Lower cost |
| Lower % return | Higher % return (but a little more complex) |
How to Pick Strike Prices
For the Long-Term Call (LEAPS):
This acts as your “stock replacement.”
- Strike Price: Choose deep-in-the-money (DITM) — e.g., 60–80% of the stock price.
- For a $100 stock → Strike around $70–$80.
- Delta: Look for a delta of ~0.80 or higher.
- Delta ≈ 0.80 means the option behaves similarly to owning the stock.
- Expiration: Choose at least 9–12 months out — ideally LEAPS (1–2 years).
- Why?: More time = more stability. Deep ITM = less time decay, more stock-like behavior.
For the Short-Term Call (the one you sell):
This is your “income generator.” rinse and repeat as long as you can.
- Strike Price: Choose out-of-the-money (OTM), e.g., 5–10% above current stock price.
- For $100 stock → maybe sell the $105 or $110 call.
- Expiration: Usually weekly or monthly.
- Most use 30–45 days till expiration for the sweet spot between time decay and premium.
- Goal: You want this to expire worthless each time so you keep the full premium.
Tools to Analyze the Strategy
Here are some tools that make this strategy much easier to track and optimize:
Options Strategy Builders & Analyzers
| Tool | What It’s Good For |
|---|---|
| OptionsProfitCalculator.com | Great for testing Poor Man’s Covered Call scenarios step by step. Free & simple. |
| OptionStrat.com | Interactive profit/loss graphs, multi-leg trades, Greeks, breakevens. Very visual. |
| Tastytrade Platform | Built for options traders; lets you simulate trades and see probabilities. |
| Thinkorswim (by TD Ameritrade) | Professional-level options analysis with strategy templates. |
| TradingView + paid options add-ons | Chart-focused, but with some good strategy overlays and alerts. |
Bonus Tips:
- Avoid earnings announcements unless you want volatility.
- Roll the short call (buy it back and sell a new one) if the stock starts approaching the short strike.
- Track your breakeven point and time decay (Theta) over time.
Let’s walk through a realistic Poor Man’s Covered Call example with Apple, using rough estimates (based on typical market pricing — we can refine with live data if needed).
Example: Poor Man’s Covered Call on Apple (AAPL)
Assume AAPL stock price = $175
Step 1: Buy a Long-Term (LEAPS) Call Option
| Item | Value |
|---|---|
| Strike Price | $120 (deep in the money) |
| Expiration | Jan 2026 (about 18–20 months out) |
| Cost (premium) | ≈ $65 per share × 100 = $6,500 |
| Delta | ~0.85 |
This behaves a lot like owning 100 shares, but you’re only spending $6,500 instead of $17,500.
Step 2: Sell a Short-Term Call Option (Income)
| Item | Value |
|---|---|
| Strike Price | $185 (slightly out of the money) |
| Expiration | 30 days out |
| Premium Collected | ≈ $2.50 per share × 100 = $250 |
If AAPL stays under $185, you keep the full $250.
You can repeat this every month — this is your “rental income.”
Repeat Monthly = Passive Income
Even if you collect $250 per month, that’s:
- $3,000 per year in income
- On a $6,500 investment, that’s a ~46% return, not including any capital gain on the LEAPS.
Want to See This in Action?
You can use OptionStrat.com (direct link to PMCC builder) to build and visualize this.
Here’s how:
- Go to OptionStrat
- Choose “Build Strategy”
- Select “Poor Man’s Covered Call”
- Enter:
- Underlying: AAPL
- Long call: Jan 2026, $120 strike
- Short call: 30 days out, $185 strike
It will show:
- A profit/loss graph
- Your breakeven
- Max profit
- Time decay effect (Theta)
- Greeks
