On This Page
- What is a poor man’s covered call?
- Poor man’s covered call entry cost
- Worked example
- Poor man’s covered call P&L at the short call’s expiration
- How to roll the short call in a poor man’s covered call
- Short call assignment in a poor man’s covered call
- Risks and limitations of the poor man’s covered call
- Bottom line
- FAQ
Key Takeaways
- A poor man’s covered call is a long call diagonal: buy a longer-dated, lower-strike call and sell a shorter-dated, higher-strike call.
- The example costs $2,250 compared with $10,000 for 100 shares at $100.
- At the short call’s expiration, calculate profit from the remaining long call’s value and the short call’s intrinsic value.
- A long call priced at $31 with stock at $110 on day 30 produces $850 profit for the example.
- Compare each new short call’s credit with the cost to close the existing call, then update the complete trade’s cash flows.
What is a poor man’s covered call?
A poor man’s covered call (PMCC) is a long call diagonal spread: it buys a longer-dated, lower-strike call and sells a shorter-dated, higher-strike call. The long call stands in for 100 shares, so the trade costs a fraction of buying the shares, and the short call brings in premium. As in a covered call, the short call limits the gain above its strike until it expires.
The long call supplies stock-price exposure. Select it by its strike, expiration, delta and price. A high-delta call tracks more of the stock’s price movement. Its value also includes remaining time and volatility exposure. The short call has its own strike, expiration and sensitivities.
Poor man’s covered call entry cost
The example buys the 12-month 80 call for $24.00 and sells the 30-day 110 call for $1.50 with stock at $100. The net debit is $22.50 per share, or $2,250 for one standard contract in each leg. Buying 100 shares at the same stock price costs $10,000.
The $150 short-call premium is one cash flow within the package. Calculate the complete trade from the entry debit and both option values.
Formula
Position P/L per share at time t = long call value at t − short call value at t − opening net debit- Multiply by 100 for one standard contract in each leg.
- At the short call’s expiration, use its intrinsic value and the longer-dated call’s remaining value.
- Include every subsequent roll debit or credit when calculating the managed position’s total result.
Worked Example
XYZ trades at $100. A trader buys one 12-month 80-strike LEAPS call for $24.00 and sells one 30-day 110-strike call for $1.50, creating a long call diagonal for a net debit.
- Entry debit: ($24.00 − $1.50) × 100 = $2,250; buying 100 shares at $100 costs $10,000
- At day 30 with stock at $110, the expiring 110 call has zero intrinsic value
- With the remaining 80 call valued at $31.00, package value is $3,100
- Position profit: ($31.00 − $22.50) × 100 = $850
The day-30 result uses the longer-dated call’s $31 value. Closing it realizes the $850 package profit. Keeping it open retains the 80 call, and selling another short call starts the next managed cycle.
Poor man’s covered call P&L at the short call’s expiration
On day 30, the short call reaches expiration while the longer-dated call retains most of its life. Position profit equals long-call value minus short-call value minus the $22.50 entry debit, multiplied by 100.
With stock at $110 and the remaining 80 call valued at $31.00, the expiring short call has zero intrinsic value. Package value is $3,100 and profit is $850. Selling the remaining call realizes that result.
Above $110, subtract the expiring short call’s intrinsic value from the remaining long call’s price. Below $110, the expiring short call contributes zero intrinsic value. Evaluate the long option at each stock price to locate the day-30 breakeven and profit peak.
How to roll the short call in a poor man’s covered call
At the management date, compare closing the package, keeping the long call, and selling a new short call. A roll buys back the existing short call and sells a replacement. Its net cash flow equals the new premium received minus the amount paid to close the old call.
Record every roll debit or credit. Update the target prices, net position cost, long-call expiration and Greeks after each change. Compare the resulting package with the original trade plan. Use options flow and price structure to select the scenarios to test, then enter both expirations in the options profit calculator to compare the position at the short call’s expiration and earlier management dates.
Short call assignment in a poor man’s covered call
For physically settled calls, assignment sells shares at the short strike while the long call stays open. Include those shares and the remaining option in the position being managed. The original option package’s debit and the cumulative cash flows provide the starting point for measuring its complete result.
Risks and limitations of the poor man’s covered call
- Size the trade to the debit. A decline costs more on the long call than the short call gives back. Without rolls, the $2,250 debit is the loss budget for the option package, and each roll debit adds to it.
- The day-30 result rides on the long call’s remaining value. The $850 profit comes from an 80 call worth $31; a lower implied volatility or a lower stock price on day 30 shrinks it, so price the long call at your target before the trade.
- Sell the short call above your price target. Above $110 the expiring short call’s intrinsic value offsets the long call’s gain, so the position stops tracking the stock on a sharp rally.
- When the short call is assigned, the account goes short 100 shares while the long call stays open, and the two have to be managed together.
- Buy enough time on the long call. Unlike shares, it expires, loses time value and collects no dividends.
Bottom line
An 80-strike LEAPS call does the work of 100 shares for $2,250 instead of $10,000, and each short call sold against it collects a month’s income. Keep the long call deep in the money, record every roll, and judge each cycle by the long call’s remaining value, which carried the $850 profit in the example.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- Fidelity: Long Diagonal Spread with Calls
- OIC: What Are Calendar and Diagonal Spreads?
- OIC: LEAPS Time Erosion Versus Delta Effect
How entries are sourced, calculated and updated: editorial methodology.