Poor Man's Covered Call Calculator

Poor Man's Covered Call at a glance

How a poor man's covered call works

In a traditional covered call you own 100 shares and sell a call against them. A poor man's covered call replaces the shares with a deep in the money LEAPS call, which moves much like stock because of its high delta but costs far less. You then sell a front month call two strikes above the money, collecting premium just as a covered call writer would. Because the LEAPS has a lower strike and a later expiration, it covers the short call and keeps the risk defined.

The payoff is shown at front month expiration, when the short call is worth only its intrinsic value and the LEAPS still has most of a year left. Profit peaks near the short strike. Above it, gains on the LEAPS are offset by losses on the short call, so the line flattens. Below it, the position loses value roughly in line with the LEAPS delta. Max profit and breakeven depend on the LEAPS value at that time, so the calculator estimates them with an American pricing model.

Before front expiration, the PMCC earns positive theta because the front month call decays much faster than a deep in the money LEAPS, which holds relatively little time value per day. The real driver is the stock. A steady rise toward the short strike is ideal, while a drop can cut the LEAPS value faster than the short call premium makes up. Over many months, the plan is to keep selling front month calls so the collected premium gradually lowers the cost of the LEAPS.

Poor Man's Covered Call example with real numbers

With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would buy 1 85 call (368 days) at $22.46, sell 1 105 call (32 days) at $1.78. That is a net debit of $2,068. At the front month expiration, the model estimates a maximum profit of $531 and a maximum loss of $2,068, with a breakeven at $98.49. The lognormal chance of profit is 57%.

These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the poor man's covered call calculator above to run the same math on real market prices.

When to use a poor man's covered call

• You are moderately bullish on a stock but want less capital tied up than buying 100 shares.
• You want to sell monthly calls for income without owning the underlying shares.
• The stock has liquid LEAPS options with reasonable bid ask spreads.
• You are comfortable rolling short calls each month and managing the LEAPS over time.

Max profit, max loss and breakeven

Maximum profit

Estimated value of the LEAPS call at front month expiration with the stock at the short strike, minus the net debit, times 100. It depends on how much time value the LEAPS keeps, so the calculator estimates it with an American pricing model; repeated short call sales over the life of the LEAPS can add to the total.

Maximum loss

Net debit paid, times 100. This would happen only if the stock fell so far that both calls became nearly worthless, which is why the LEAPS strike and cost matter so much.

Breakeven

At front month expiration, the breakeven is the stock price where the LEAPS call's estimated value equals the net debit. It sits below the long strike plus the net debit because the LEAPS still has time value, and the calculator estimates it with its American model. If held to LEAPS expiration with no further premium collected, the breakeven would be the long strike plus the net debit.

Poor Man's Covered Call Greeks

• Delta: Delta is clearly positive, driven by the high delta of the deep in the money LEAPS minus the smaller delta of the short call. The position behaves like owning somewhat fewer than 100 shares, and delta shrinks as the stock approaches and passes the short strike.
• Gamma: Gamma is negative near the short strike as front expiration approaches, because the short front month call has much more gamma than the deep LEAPS.
• Theta: Theta is positive, since the short front month call decays far faster than the LEAPS loses time value.
• Vega: Vega is usually positive, because a one year LEAPS has more exposure to implied volatility than a front month call, though a deep in the money LEAPS carries less vega than an at the money option. A broad volatility drop lowers the LEAPS value somewhat.

See the live numbers for your position in the Greeks tab of the calculator, or explore a single option in the options Greeks calculator.

Early exercise and assignment risk

This is where a poor man's covered call differs most from a real covered call. If the short front month call goes in the money ahead of an ex dividend date, an American call holder may exercise it the day before the ex date to capture the dividend, especially when the dividend exceeds the call's remaining time value. With a traditional covered call your shares are simply called away. With a PMCC you own no shares, so assignment leaves you short 100 shares, and you owe the dividend if you are still short on the ex date.

Your LEAPS call covers that short stock, so the risk stays defined, but exercising the LEAPS to deliver shares forfeits its remaining time value, which can be meaningful on a one year option. It is usually better to buy back the shares, or to sell the LEAPS and buy the shares together. Remember that a LEAPS holder does not receive dividends, and expected dividends lower call values. The best defense is to roll the short call before the ex date whenever it is in the money with little time value.

The calculator's Early exercise risk tab flags short legs that are likely to be assigned. For a single option, use the early exercise calculator or read how early exercise and assignment work.

Pros and cons

How to manage a poor man's covered call

• Choose a deep in the money LEAPS with a high delta and relatively little time value, so it tracks the stock closely.
• Keep the short strike above the LEAPS strike plus the net debit so that an assignment or a sharp rally does not lock in a loss.
• Roll the short call up and out when the stock rallies through it, and roll it down only with care so the strike stays above your cost.
• Roll the LEAPS to a later expiration well before its final months, when its time decay starts to speed up.

Poor Man's Covered Call FAQ

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Educational tool, not financial advice. Calculations are theoretical and depend on your inputs; real fills, fees, early assignment and dividends can change results. Options involve risk and are not suitable for every investor.