Poor Man’s Covered Call: All the Income, 80% Less Capital (And 100% More Complexity)

Because why buy 100 shares for $15,000 when you can buy a LEAP for $3,000 and pretend you own the stock?

---

Congratulations. You’ve mastered covered calls, understood the Greeks, run the Wheel Strategy, and built a diversified portfolio. You’re generating consistent income and feeling pretty good about yourself. Then you do the math on how much capital you have tied up in stocks and realize: “Holy shit, I have $150,000 deployed just sitting there generating 2-3% monthly premium. What if I could generate the same income with $40,000?”

Welcome to the Poor Man’s Covered Call, where you discover that you don’t actually need to OWN the stock to sell covered calls against it. You just need to control it. And the cheapest way to control 100 shares of stock without buying them? A deep in-the-money LEAP option.

The PMCC (Poor Man’s Covered Call) is a diagonal spread disguised as a covered call. You buy a long-dated (LEAP) call option that acts as your “stock,” then sell short-term call options against it just like traditional covered calls. Same premium collection, same strategy mechanics, but with 60-80% less capital required.

It sounds like financial alchemy. It kind of is. But it’s also legitimate, widely used, and can significantly improve your capital efficiency. The catch? Everything that can go wrong with covered calls can ALSO go wrong with PMCC, plus a bunch of new ways to lose money that don’t exist when you actually own the stock.

This is not a beginner strategy. If you haven’t already completed Modules 0-9, go back and do those first. PMCC is covered calls on hard mode. You need to understand Greeks (especially Delta and Theta), rolling mechanics, and risk management before attempting this. Otherwise you’re going to blow yourself up spectacularly.

Table of Contents

• PMCC Mechanics: What You’re Actually Doing
• Capital Efficiency: The Math That Makes PMCC Attractive
• Selecting Your LEAP (The Long Leg)
• Selecting Your Short Calls (The Income Generator)
• PMCC vs. Traditional Covered Calls: When Each Wins
• Managing the LEAP Position
• Rolling Techniques Specific to PMCC
• Early Assignment Risk and PMCC
• PMCC Risk Management
• Tax Implications of PMCC
• Common PMCC Mistakes (And How They’ll Cost You)

PMCC Mechanics: What You’re Actually Doing

Let’s start with what a PMCC actually IS, because most explanations make it sound more complicated than it needs to be.

Traditional Covered Call

What you do:

• Buy 100 shares of stock for $15,000 (stock at $150)
• Sell a 30-day call with $155 strike for $3.00
• Collect $300 premium
• Hope stock stays below $155

Capital required: $15,000 (full stock cost) Income: $300/month on $15,000 = 2% monthly return

Poor Man’s Covered Call (PMCC)

What you do:

• Buy a LEAP call (12+ months out, deep ITM) with $130 strike for $30.00 = $3,000
• Sell a 30-day call with $155 strike for $3.00
• Collect $300 premium
• Hope stock stays below $155

Capital required: $3,000 (LEAP cost) Income: $300/month on $3,000 = 10% monthly return

The Secret: Your LEAP call with $130 strike behaves ALMOST identically to owning 100 shares. It has a Delta near 1.00 (moves dollar-for-dollar with the stock). So when you sell calls against it, the market treats it like you own the stock.

Why It’s Called a “Diagonal Spread”

In options trader terminology:

• Long 130 call (12-18 months out) = Long leg
• Short 155 call (30 days out) = Short leg
• Different strikes + different expirations = Diagonal spread

But thinking of it as a “diagonal spread” is confusing. Just think of it as: “I’m using a LEAP as synthetic stock ownership to run covered calls.”

The Complete Example

Stock: AAPL trading at $150

Traditional Covered Call Setup:

• Buy 100 shares: $15,000
• Sell Feb $155 call: $300
• Total capital: $15,000
• Monthly income: $300 (2.0%)

PMCC Setup:

• Buy Jan 2026 (14 months out) $130 LEAP call: $3,000
• Sell Feb $155 call: $300
• Total capital: $3,000
• Monthly income: $300 (10.0%)

Same premium collection, 80% less capital.

What Could Possibly Go Wrong?

Oh, so many things. But we’ll get to those. First, let’s talk about why anyone would do this.

Capital Efficiency: The Math That Makes PMCC Attractive

Let’s do the actual math on why people run PMCC despite the added complexity and risk.

Capital Comparison

Portfolio: $100,000 available capital

Traditional Covered Calls:

• Buy 6 different stocks at $15,000 each = $90,000 deployed
• Sell 6 covered calls at $300 each = $1,800 monthly income
• Cash remaining: $10,000
• Return on capital: 1.8% monthly ($1,800/$100,000)

PMCC Approach:

• Buy 6 LEAP positions at $3,000 each = $18,000 deployed
• Sell 6 short calls at $300 each = $1,800 monthly income
• Cash remaining: $82,000 (for more positions or safety buffer)
• Return on deployed capital: 10% monthly ($1,800/$18,000)
• Return on total capital: 1.8% monthly ($1,800/$100,000)

Wait, the returns are the same?

On total capital, yes. But the PMCC gives you $82,000 in remaining buying power to:

• Run 20+ more PMCC positions (with proper risk management)
• Keep larger safety buffer for market crashes
• Invest remaining capital elsewhere
• Sleep better knowing you’re not 90% deployed

The Leverage Effect

Traditional covered call on $15,000 stock:

• Stock drops 10% = $1,500 loss (10% of capital)
• Stock rises 10% = $1,500 gain (10% of capital)

PMCC on $3,000 LEAP:

• Stock drops 10% = $1,200-1,500 loss (40-50% of capital)
• Stock rises 10% = $1,200-1,500 gain (40-50% of capital)

The numbers: Same dollar gains/losses, but 5x the percentage impact on PMCC capital.

This is leverage. When it works in your favor (stock goes up or stays flat), you look like a genius - generating 8-12% monthly returns. When it works against you (stock drops 20%), your LEAP loses 60-80% of its value and you’re in deep trouble.

The Break-Even Math

Traditional covered call:

• Buy stock at $150
• Sell call for $3, net basis $147
• Stock can drop to $147 before you lose money
• Downside protection: 2% ($3/$150)

PMCC:

• Buy $130 LEAP for $30, effective basis $160 ($130 + $30)
• Sell call for $3, net basis $157
• Stock can drop to $157 before LEAP+call position loses money
• But LEAP alone breaks even at $160
• Downside protection: 4.7% ($7/$150) until assignment

Wait, PMCC has BETTER downside protection?

Kind of. On the surface, yes - you collected $7 total premium ($3 from call + $4 extrinsic on the LEAP purchase). But that’s misleading because:

1. LEAP loses value faster than stock if volatility drops
2. LEAP has theta decay (stock doesn’t)
3. LEAP could be worthless at expiration if stock drops significantly

Real-World Return Example

6-Month PMCC Performance:

Month 1:

• LEAP cost: $3,000
• Sell call: $300 income
• Net invested: $2,700

Month 2-6:

• Sell call each month: $300 × 5 = $1,500
• Total premium collected: $1,800
• LEAP now worth: $3,200 (stock went from $150 → $160)
• Total profit: $1,800 (premium) + $200 (LEAP gain) = $2,000
• Return: 66.7% in 6 months ($2,000 / $3,000)

Compare to traditional covered call:

• Stock cost: $15,000
• Premium collected: $1,800 (same)
• Stock gain: $1,000 ($150 → $160)
• Total profit: $2,800
• Return: 18.7% in 6 months ($2,800 / $15,000)

PMCC generated 66.7% return vs. 18.7% for traditional covered calls. That’s the capital efficiency magic.

But here’s the risk nobody mentions: If the stock had dropped from $150 → $140 instead:

• Traditional covered call: Down $1,000 on stock, collected $1,800 premium = Net +$800 (5.3% gain)
• PMCC: LEAP down $1,500, collected $1,800 premium = Net +$300 (10% gain on PMCC capital, but only because of lucky premium timing)

The leverage cuts both ways.

Selecting Your LEAP (The Long Leg)

Your LEAP is your “synthetic stock.” Selecting it incorrectly ruins the entire strategy.

LEAP Selection Criteria

1. Expiration: 12-24 Months Out

Why not shorter?

• Options under 12 months lose theta value too quickly
• You want your LEAP to behave like stock (minimal theta decay)
• Need time for strategy to work through multiple short-call cycles

Why not longer?

• Options over 24 months (deep LEAPs) have wider bid-ask spreads
• Less liquidity = harder to exit if needed
• More expensive upfront

Sweet spot: 12-18 months (plenty of time, reasonable cost, good liquidity)

2. Strike Selection: Deep In-The-Money (0.75-0.90 Delta)

This is critical. Your LEAP needs to move dollar-for-dollar with the stock.

Delta requirements:

• Minimum: 0.75 Delta
• Ideal: 0.80-0.85 Delta
• Maximum: 0.90 Delta

Why deep ITM?

• High Delta means it tracks stock movement closely
• Lower extrinsic value = less theta decay
• More intrinsic value = more protection

Example strikes for $150 stock:

• $130 strike: 0.82 Delta ✓ Good
• $120 strike: 0.88 Delta ✓ Excellent
• $110 strike: 0.92 Delta ✓ Great, but more expensive
• $140 strike: 0.65 Delta ✗ Too low, won’t track stock well

3. Liquidity: Open Interest > 100, Tight Spreads

Check before buying:

• Open interest: Look for >100 contracts (more is better)
• Bid-ask spread: Should be <5% of option price
• Volume: Some recent trading activity

Example:

• LEAP priced at $30.00
• Bid: $29.80 / Ask: $30.20
• Spread: $0.40 (1.3%) ✓ Acceptable
• Open interest: 500 ✓ Good

Bad example:

• LEAP priced at $30.00
• Bid: $28.50 / Ask: $31.50
• Spread: $3.00 (10%) ✗ Too wide, avoid

Wide spreads kill your profitability when entering and exiting.

Cost Structure of LEAPs

LEAP Price = Intrinsic Value + Extrinsic Value

Example: $130 LEAP on $150 stock

• Intrinsic value: $20 ($150 stock - $130 strike)
• Extrinsic value: $10 (time value + volatility premium)
• Total LEAP cost: $30

What you’re paying for:

• $20 = The “stock equivalent” value (what you’d have if you exercised today)
• $10 = The “option premium” for 14 months of leverage

That $10 extrinsic value will decay to $0 by LEAP expiration. This is your cost of using leverage instead of owning stock.

Annual theta cost on this LEAP: ~$10/year = $0.83/month

Compare to:

• Stock ownership theta: $0/month (stocks don’t decay)
• Short-term option theta: $2-5/month (for a 30-day option)

LEAPs decay slowly, but they DO decay. Factor this into your returns.

LEAP Selection Examples

Stock: AAPL at $150

Option A: Jan 2026 (14 months) $130 strike

• Cost: $30.00
• Delta: 0.82
• Open interest: 800
• Spread: $0.30 (1%)
• Grade: A - Excellent choice

Option B: Jan 2026 $145 strike

• Cost: $12.00
• Delta: 0.55
• Open interest: 1,200
• Spread: $0.20 (1.7%)
• Grade: C - Delta too low, won’t track stock well

Option C: Jan 2027 (26 months) $120 strike

• Cost: $38.00
• Delta: 0.88
• Open interest: 150
• Spread: $0.80 (2.1%)
• Grade: B - Good Delta, but expensive and wider spread

Option D: Jun 2025 (6 months) $130 strike

• Cost: $24.00
• Delta: 0.78
• Open interest: 600
• Spread: $0.25 (1%)
• Grade: D - Too short-dated, theta decay too fast

Choose Option A. High Delta, reasonable cost, good liquidity, appropriate time frame.

Selecting Your Short Calls (The Income Generator)

Once you have your LEAP, selling short calls against it works almost identically to traditional covered calls. Almost.

Strike Selection for Short Calls

General principle: Sel strikes ABOVE your LEAP strike by at least $10-20.

Why?

• If your short call gets assigned, you’ll exercise your LEAP to deliver shares
• Your profit is capped at (short call strike - LEAP strike - LEAP cost + all premiums)
• Need enough spread to make assignment profitable

Example:

• LEAP: $130 strike, cost $30
• Short call: $155 strike
• If assigned: Profit = ($155 - $130 - $30) + premiums = -$5 + premiums

Wait, that’s negative before premiums! You need to collect enough premium over time to make this profitable.

Better short call strike: $160

• If assigned: ($160 - $130 - $30) + premiums = $0 + premiums
• All profit comes from premiums (same as traditional covered call at $150 basis)

Rule of Thumb: Short call strike should be ≥ (LEAP strike + LEAP cost / 100)

Example: $130 LEAP costing $30 → Sell calls at $160+ strikes ($130 + $30 = $160)

Delta Selection for Short Calls

Same as traditional covered calls:

• Conservative (want to keep position): 0.20-0.30 Delta
• Balanced: 0.30-0.40 Delta
• Aggressive (want assignment): 0.40-0.50 Delta

PMCC-specific consideration: Since your LEAP has theta decay, you might want slightly more aggressive strikes (higher premium) to offset LEAP theta.

Example:

• Stock at $150
• LEAP: $130 strike (0.82 Delta)
• Conservative: Sell $160 call (0.25 Delta) for $1.80
• Balanced: Sell $155 call (0.35 Delta) for $3.00
• Aggressive: Sell $152 call (0.45 Delta) for $4.50

Time Frame: Same as Traditional Covered Calls

30-45 days optimal:

• Good theta decay
• Manage/roll at 7-14 days remaining
• Multiple cycles per year

Weekly options possible:

• Higher theta, more management
• Can work well with PMCC if you’re active

60+ days not recommended:

• Your LEAP is decaying
• Short call theta is low
• Not generating enough income to offset LEAP decay

The Short Call Sweet Spot Formula

Target monthly premium ≥ (LEAP cost / LEAP months remaining) × 1.5

Example:

• LEAP cost: $3,000
• Months remaining: 14
• Monthly theta cost: $214/month ($3,000/14)
• Target short call premium: $321/month ($214 × 1.5)

This ensures you’re collecting enough premium to:

1. Offset LEAP theta decay
2. Generate actual profit
3. Have buffer for management/adjustments

If you can’t generate this much premium, the PMCC might not be profitable enough vs. the risks.

PMCC vs. Traditional Covered Calls: When Each Wins

Let’s be brutally honest about when PMCC makes sense and when it’s just showing off.

When PMCC Dominates

1. Limited Capital Accounts ($10k-50k)

If you have $25,000 total capital:

• Traditional CC: Can run 1-2 positions ($15k each)
• PMCC: Can run 6-8 positions ($3k each)

More positions = better diversification = lower risk per position

2. Capital Efficiency Obsession

You have $100,000 but want it working harder:

• Traditional CC: Deploy all $100k in 6-7 positions, generate $2,000/month
• PMCC: Deploy $25k in 8 positions, generate $2,000/month, keep $75k for opportunities

That $75k can be:

• Safety buffer for crashes
• Deployed in other strategies
• Earning money market interest (5% currently)

3. Non-Dividend Stocks

PMCC makes more sense on stocks that don’t pay dividends:

• Traditional CC: Collect dividends + premiums
• PMCC: Collect premiums only (LEAP holders don’t get dividends)

Example stocks where PMCC shines:

• TSLA (no dividend)
• AMZN (no dividend)
• NVDA (tiny dividend)
• Growth stocks generally

4. High IV Stocks

When implied volatility is high:

• Option premiums are fat on BOTH the LEAP and short calls
• You buy expensive LEAP but offset with expensive short calls
• Net effect can be profitable

5. Tax-Deferred Accounts

In IRAs/401ks:

• No dividend taxation considerations
• Can use leverage (PMCC) without margin concerns
• Tax treatment doesn’t change strategy

When Traditional Covered Calls Win

1. Dividend Income Focus

If you want/need dividend income:

• Traditional CC: Collect dividends + premiums (double income)
• PMCC: Premiums only

Example: Dividend stock yielding 3% annually

• $15,000 position = $450/year in dividends
• Plus $300/month in premiums = $3,600/year
• Total income: $4,050

PMCC on same stock:

• $3,000 position, no dividends
• $300/month in premiums = $3,600/year
• Total income: $3,600

You lose $450/year to dividend miss. PMCC would need 1% higher monthly premium just to break even.

2. Large Account Simplicity ($250k+)

With $250,000+ capital:

• Capital efficiency is less important
• Complexity trade-off not worth it
• Just own the stocks directly
• Sleep better

3. Conservative Risk Tolerance

Traditional covered calls are inherently more conservative:

• Stock ownership = tangible asset
• No theta decay on the “stock” leg
• No liquidity concerns with LEAPs
• Worst case: Hold stock long-term

PMCC is leveraged:

• LEAP can expire worthless
• Theta decay is real cost
• Liquidity can vanish in crashes
• Worst case: Total loss of LEAP capital

4. Volatile/Uncertain Markets

In high volatility environments:

• LEAP prices spike (expensive to buy)
• Vega risk means LEAP can lose value even if stock flat
• Traditional CC: Stock stays flat, you’re fine
• PMCC: LEAP loses value from IV crush

5. Want to Hold Long-Term

If you love a stock and want to hold 5+ years:

• Traditional CC: Own the stock, sell calls occasionally
• PMCC: Need to roll LEAP every 1-2 years (transaction costs, timing risk)

The Honest Comparison Chart

Factor	Traditional CC	PMCC	Winner
Capital required	$15,000	$3,000	PMCC
Monthly premium collected	$300	$300	Tie
Return on capital	2%	10%	PMCC
Dividend income	Yes	No	Traditional
Simplicity	Simple	Complex	Traditional
Downside protection	Good	Moderate	Traditional
Theta decay cost	None	$200-300/mo	Traditional
Leverage risk	None	5:1	Traditional
Tax treatment	Better	More complex	Traditional
Early assignment risk	Safe	Complicated	Traditional
Best for small accounts	No	Yes	PMCC
Best for large accounts	Yes	No	Traditional

The verdict: PMCC is a tool for specific situations, not a universal improvement over traditional covered calls.

Managing the LEAP Position

Your LEAP is your synthetic stock. It requires active management.

When to Roll Your LEAP

Don’t wait until expiration. Roll your LEAP when:

1. 3-6 Months Remaining

Once your LEAP has <6 months left, theta decay accelerates significantly. Time to roll.

Rolling process:

• Close current LEAP (sell to close)
• Open new LEAP 12-18 months out
• Net cost: Usually a debit (you’ll pay to roll)

Example:

• Current LEAP (4 months left): $130 strike, worth $24
• New LEAP (15 months out): $130 strike, costs $29
• Roll cost: $500 debit ($29 - $24 = $5 × 100)

That $500 is the cost of extending your position another year.

2. LEAP Delta Drops Below 0.70

If your stock drops significantly and your LEAP Delta falls to 0.60-0.65:

• It’s no longer tracking stock movements well
• Consider rolling down to lower strike (higher Delta)
• Or exit the position entirely

Example:

• Original LEAP: $130 strike, was 0.82 Delta
• Stock dropped from $150 → $135
• LEAP now: 0.62 Delta
• Action: Roll to $120 strike (0.78 Delta) or exit

3. Major Stock Movement

If stock rallies significantly:

• Your LEAP is now DEEP ITM (0.95+ Delta)
• Almost no extrinsic value left
• Lots of intrinsic value at risk

Consider:

• Rolling up to higher strike (take profits, maintain leverage)
• Exiting LEAP, switching to traditional covered call
• Or leaving it (high Delta is good for PMCC)

LEAP Exit Strategies

Exit 1: Roll Forward

• Sell current LEAP
• Buy new LEAP 12-18 months out, same strike
• Continue PMCC strategy

Exit 2: Exercise LEAP, Convert to Traditional CC

• Exercise your LEAP (pay strike price, receive 100 shares)
• Now own stock, run normal covered calls
• Good if you have capital and want to simplify

Example:

• LEAP: $130 strike
• Exercise: Pay $13,000, receive 100 shares
• Now own stock worth $15,000
• Continue selling calls normally

Exit 3: Close Everything

• Sell LEAP
• Buy back any outstanding short calls
• Exit position completely
• Take profit or loss

Managing Multiple PMCC Positions

With 6-10 PMCC positions:

Stagger LEAP expirations:

• Position A: LEAP expires Jan 2026
• Position B: LEAP expires Mar 2026
• Position C: LEAP expires May 2026

Benefit: Not rolling all LEAPs at once (smoother cash flow, less market timing risk)

Track LEAP theta cost:

• Position A: Losing $200/month to theta
• Position B: Losing $250/month to theta
• Position C: Losing $180/month to theta
• Total LEAP decay: $630/month

Your short calls need to generate >$945/month ($630 × 1.5) to be profitable after LEAP costs.

Rolling Techniques Specific to PMCC

Rolling PMCC positions has unique considerations vs. traditional covered calls.

Rolling the Short Call (Standard)

This works exactly like traditional covered calls:

• Buy back current short call
• Sell new short call (higher strike, farther expiration, or both)
• Net credit or debit depending on situation

No difference from traditional CC rolling.

The LEAP+Call Roll (Advanced)

Sometimes you need to roll BOTH legs simultaneously:

Scenario: Stock dropped significantly, both your LEAP and short call are underwater.

Current position:

• LEAP: $130 strike (6 months left), worth $15 (down from $30)
• Short call: $155 strike (2 weeks left), worth $0.10
• Stock at $140 (down from $150)

The simultaneous roll:

• Close LEAP: Sell for $1,500 (realize $1,500 loss)
• Close short call: Buy for $10 (almost free)
• Open new LEAP: Buy $120 strike (15 months), cost $2,800
• Open new short call: Sell $145 strike (30 days), collect $300

Net cost: $1,500 + $10 - $2,800 + $300 = -$1,010 debit

You paid $1,010 to:

• Reset position with lower strikes (better for recovery)
• Extend LEAP time by 9 months
• Position yourself for better premium collection

When to do this: When both legs need adjustment and stock has moved significantly against you.

Rolling Down the LEAP (Defensive)

Stock drops 20%, your LEAP is hurting. Roll down to lower strike:

Before:

• LEAP: $130 strike, Delta 0.60, worth $12 (cost was $30)
• Stock at $135

After rolling down:

• Close $130 LEAP for $1,200
• Buy $115 LEAP for $2,400
• Cost: $1,200 debit

Result:

• New LEAP has 0.82 Delta (tracks stock better)
• Lower strike = more intrinsic value protection
• Cost: $1,200 to reset position

Rolling Up the LEAP (Offensive)

Stock rallies 20%, your LEAP is doing great. Take profits by rolling up:

Before:

• LEAP: $130 strike, Delta 0.95, worth $40 (cost was $30)
• Stock at $170

After rolling up:

• Close $130 LEAP for $4,000 (realize $1,000 profit)
• Buy $150 LEAP for $3,200
• Credit: $800

Result:

• Locked in $800 profit
• Reset leverage (new LEAP has 0.80 Delta vs. 0.95)
• Continue PMCC with higher strikes

The PMCC Repair Strategy

Your PMCC is down bad. Stock dropped 25%. Here’s how to salvage it:

Damage assessment:

• LEAP: $130 strike, now worth $8 (cost was $30, down $2,200)
• Short call: Expired worthless (collected $300 × 3 months = $900)
• Stock at $120
• Net loss: $1,300

Repair options:

Option 1: Double Down (Aggressive)

• Buy another LEAP at $110 strike for $2,000
• Now have 2 LEAPs (averaging down)
• Sell 2 short calls going forward
• If stock recovers to $150, both LEAPs profit significantly

Option 2: Hold and Collect (Patient)

• Keep current LEAP
• Sell even more aggressive short calls (0.45-0.50 Delta)
• Collect $400+/month until recovery
• Need stock to recover to $145+ to break even

Option 3: Cut Losses (Realistic)

• Close LEAP for $800
• Realize $2,200 loss
• Move on to better opportunity
• Sometimes the best repair is accepting defeat

Early Assignment Risk and PMCC

This is where PMCC gets tricky. Early assignment on your short call creates a unique problem.

The Traditional CC Early Assignment

What happens:

• Your short call gets assigned early
• Stock disappears from account
• Cash appears (strike price × 100)
• You’re neutral (no position)

Example:

• Own stock at $150
• Short $155 call assigned early
• Receive $15,500 cash
• Done. Close the position or start over.

The PMCC Early Assignment Problem

What happens:

• Your short call gets assigned early
• But you don’t own stock - you own a LEAP
• Broker needs to deliver 100 shares to the call buyer
• You have two choices:
  1. Exercise your LEAP to get shares (deliver them)
  2. Broker buys shares at market, delivers them, charges you

This is where PMCC gets expensive if mishandled.

The Early Assignment Scenarios

Scenario 1: In-The-Money Assignment Before Ex-Div

Stock about to go ex-dividend. Your short call is ITM with no time premium.

Your position:

• LEAP: $130 strike
• Short call: $155 strike
• Stock at $158, ex-div tomorrow, $1.00 dividend
• Your short call gets assigned overnight

What happens:

• Call buyer wants stock to capture dividend
• You don’t have stock, you have LEAP
• Must deliver shares

Your choices:

Choice A: Exercise LEAP

• Pay $13,000 (LEAP strike)
• Receive 100 shares
• Deliver shares for $15,500 (short call strike)
• Profit: $2,500 - LEAP premium paid

Choice B: Let broker handle it

• Broker buys 100 shares at market ($15,800)
• Delivers shares for $15,500 (short call strike)
• Loss: $300 (bought at $158, delivered at $155)
• Plus your LEAP still exists (now worthless or less valuable)

Choice A is better - exercise your LEAP to deliver shares.

How to Handle Early Assignment

If your short call gets assigned:

Step 1: Check position in account

• Do you have a short stock position? (You’ve been assigned)
• Do you still have your LEAP? (Yes)

Step 2: Immediately exercise LEAP

• Call your broker or use the platform
• Exercise your LEAP call
• This buys 100 shares at LEAP strike
• Shares deliver against your short stock position
• Position resolved

Step 3: Calculate P&L

• Profit/loss = (short call strike - LEAP strike) × 100 - LEAP cost + all premiums collected

Example:

• LEAP: $130 strike, cost $3,000
• Short call: $155 strike
• Premiums collected: $900 (3 months of calls)
• Assignment profit: ($155 - $130) × 100 = $2,500
• Total P&L: $2,500 - $3,000 + $900 = $400 profit

Preventing Early Assignment Headaches

1. Avoid Ex-Div Dates with ITM Calls

• Check ex-div calendar before selling calls
• If call will be ITM near ex-div, roll early or go further OTM

2. Monitor Deep ITM Positions

• If your short call goes deep ITM (0.90+ Delta), high assignment risk
• Roll or close position before assignment

3. Keep Enough Cash for Exercise

• If early assigned, you need cash to exercise LEAP
• LEAP strike × 100 = cash required
• Example: $130 LEAP requires $13,000 cash to exercise

4. Use Brokers That Handle This Automatically

• Some brokers auto-exercise your LEAP if short call assigned
• Others require manual intervention
• Know your broker’s policy

PMCC Risk Management

Every risk from traditional covered calls exists in PMCC, plus several unique ones.

Unique PMCC Risks

1. LEAP Expiration Risk

Unlike stock (which doesn’t expire), your LEAP will expire:

• If stock is below LEAP strike at expiration, LEAP expires worthless
• Total loss of capital
• No “hold and wait for recovery” like with stock

Example:

• Buy $130 LEAP for $3,000
• Stock crashes to $120
• At LEAP expiration: LEAP worth $0
• Total loss: $3,000

With traditional CC, you’d own stock worth $12,000 (bad, but not zero).

2. Theta Decay Risk

Your LEAP loses value every day:

• 12-month LEAP: ~$0.80/day theta decay
• That’s $24/month just from time passing
• Must generate >$24/month in short call premium just to break even

3. Liquidity Risk

LEAPs have less liquidity than stock:

• Wider bid-ask spreads when exiting
• Open interest can dry up in crashes
• May not be able to exit at fair price

4. Spread Cost Risk

Every LEAP transaction costs you the spread:

• Entering position: Pay the ask (slightly overpay)
• Exiting position: Receive the bid (slightly underpaid)
• Rolling LEAP annually: Pay spread 2x per roll

Example:

• LEAP spread: $0.50 (bid $29.50, ask $30.00)
• Enter: Pay $30
• Exit: Receive $29.50
• Cost: $0.50 spread = $50 per transaction

Over 3 years with 2 rolls: $50 × 6 transactions = $300 in spread costs

5. Vega Risk

If implied volatility drops:

• Your LEAP loses value (Vega is positive for long options)
• Stock price unchanged, but LEAP worth less
• Short calls also worth less (good), but may not offset

Example:

• Buy LEAP when VIX = 25 (high IV), cost $3,200
• VIX drops to 15 (low IV)
• Stock unchanged at $150
• LEAP now worth $2,700 (lost $500 from IV crush)

Position Sizing for PMCC

Even more conservative than traditional covered calls:

Maximum per position: 5-8% of portfolio

$100,000 portfolio:

• Max PMCC position: $5,000-8,000
• Can run 12-20 positions safely
• But should probably run 8-12 to leave capital buffer

Why smaller than traditional CC?

• LEAP can go to zero (stock can’t)
• Leverage magnifies losses
• Need buffer for LEAP rolling costs

Stop Loss Rules for PMCC

LEAP-based stop:

• If LEAP loses 50%+ of original value, strongly consider exit
• If LEAP Delta drops below 0.60, consider exit or roll down

Time-based stop:

• If LEAP has <6 months and underwater, exit or roll
• Don’t let LEAPs expire worthless

Portfolio-level stop:

• If 3+ PMCC positions simultaneously down 40%+, market has changed
• Close underwater positions, preserve capital
• Pause PMCC until market stabilizes

The PMCC Risk Checklist

Before entering any PMCC position, verify:

• LEAP has 12+ months to expiration
• LEAP strike is deep ITM (0.75-0.85 Delta)
• LEAP open interest > 100
• LEAP spread < 5% of price
• Stock is optionable with good liquidity
• You understand your broker’s early assignment policy
• Position size < 8% of portfolio
• Can afford to exercise LEAP if needed (have strike × $100 cash)
• Know the ex-dividend dates
• Can generate enough short call premium to offset LEAP theta + profit

If any checkbox fails, reconsider the position.

Tax Implications of PMCC

PMCC taxation is more complex than traditional covered calls.

Holding Period Complications

Traditional covered call:

• Buy stock, hold 1+ year = long-term capital gains (lower tax rate)
• Sell stock after 1+ year = 15-20% tax rate

PMCC:

• Buy LEAP, hold 1+ year, sell = long-term capital gains
• But: Frequent LEAP rolling means you rarely hold >1 year
• Most PMCC gains are short-term (ordinary income rates, 24-37%)

Straddle Rules and PMCC

IRS Straddle Rule: If you have offsetting positions (like PMCC), special rules apply:

The issue:

• Your LEAP is long call (gains)
• Your short calls are offsetting (losses)
• This can create “straddle” for tax purposes

Effect:

• May not be able to deduct losses until you close offsetting positions
• Holding period may be suspended
• Complicates tax reporting

Solution: Consult tax professional if running significant PMCC volume

Premium Taxation

Same as covered calls:

• Short call premium = short-term capital gain if expires worthless
• Short call premium = added to sale proceeds if assigned

LEAP profit/loss:

• Closing LEAP at profit = capital gain (short or long-term)
• LEAP expiring worthless = capital loss

Qualified vs. Unqualified Calls

The rule: If you sell calls that are “too close” to stock price (or too far ITM), they’re “unqualified” calls that reset your holding period.

For PMCC: This is less relevant since you don’t own stock, but can still apply to LEAP holding period.

Safe harbor: Sell calls at strike ≥ LEAP strike + LEAP cost/100 to avoid issues.

Example:

• LEAP: $130 strike, cost $30
• Safe strike: $160+ ($130 + $30)
• Selling $155 strike might trigger unqualified treatment

Tax-Advantaged Accounts

Best place for PMCC: IRA or Roth IRA

Advantages:

• No annual tax on gains
• No ordinary income on short call premiums
• No straddle rule complications
• Can roll LEAPs freely without tax events

Limitation:

• Some IRAs don’t allow PMCC (broker-dependent)
• Check if your IRA permits “long calls + short calls”

Record Keeping Requirements

For PMCC, track:

• Every LEAP purchase (date, strike, expiration, cost)
• Every LEAP sale/roll (date, proceeds)
• Every short call sold (date, strike, expiration, premium)
• Every short call closed/rolled (date, cost)
• Every short call assignment (date, proceeds)
• Every LEAP exercise (date, strike)

Without good records, tax preparation is nightmare.

Cover My Assets auto-tracks all this. Manual Excel tracking… good luck.

Common PMCC Mistakes (And How They’ll Cost You)

Mistake #1: Buying Too Short-Dated LEAPs

The error: You buy a 9-month LEAP thinking “it’s cheaper than 18-month.”

Why it’s wrong:

• Theta decay accelerates at <6 months
• You’ll need to roll in 3-4 months
• Rolling costs eat your profits

The cost:

• 9-month LEAP theta: ~$1.20/day ($36/month)
• 18-month LEAP theta: ~$0.70/day ($21/month)
• Extra decay: $15/month = $180/year

The fix: Buy 12-18 month LEAPs. Pay more upfront, save on theta and rolling costs.

Mistake #2: Selling Calls Too Close to LEAP Strike

The error: LEAP at $130, stock at $150, you sell $145 calls.

Why it’s wrong: If assigned:

• You deliver shares by exercising LEAP
• Profit = ($145 - $130) × 100 = $1,500
• Less LEAP cost: $1,500 - $3,000 = -$1,500 loss
• Plus premiums collected: Maybe $900
• Net: -$600 loss despite assignment “working”

The fix: Sell calls at strike ≥ (LEAP strike + LEAP cost/100). In this example, $160+ strikes.

Mistake #3: Ignoring LEAP Delta Decay

The error: You buy LEAP with 0.82 Delta, stock drops 10%, LEAP Delta now 0.65. You ignore it and keep selling calls.

Why it’s wrong:

• Your LEAP doesn’t track stock movement well anymore
• Stock could recover but LEAP won’t capture full gains
• Your “synthetic stock” is broken

The fix: Monitor LEAP Delta monthly. If it drops below 0.70, roll down to lower strike or exit position.

Mistake #4: Running PMCC Through Ex-Dividend

The error: Stock goes ex-dividend tomorrow. Your short call is ITM. You do nothing.

Why it’s wrong:

• High probability of early assignment
• You don’t get the dividend (LEAP holders don’t receive dividends)
• Call buyer gets dividend
• You wake up short 100 shares

The fix: Either:

• Roll your call before ex-div date
• Close your call
• Be prepared to exercise LEAP if assigned

Mistake #5: Insufficient Cash for LEAP Exercise

The error: You run PMCC with $3,000 LEAP ($130 strike). You only have $5,000 total cash. Short call gets early assigned.

Why it’s wrong:

• Need $13,000 to exercise LEAP and deliver shares
• You only have $5,000
• Broker will buy shares at market, deliver them, charge you
• If stock gapped up to $165, you’re buying at $165, delivering at $155 (short call strike)
• Loss: $1,000+ plus your LEAP is now worthless

The fix: Always maintain cash equal to LEAP strike × 100. If running $130 LEAP, keep $13,000 available.

Mistake #6: Over-Leveraging with PMCC

The error: You have $30,000 capital. You run 15 PMCC positions at $2,000 each.

Why it’s wrong:

• 100% deployed in leverage
• No buffer for LEAP rolling costs
• No buffer for market crash
• If 5 LEAPs need emergency rolls simultaneously, you don’t have capital

The fix: Max 60-70% of capital in PMCC. Keep 30-40% cash buffer.

Mistake #7: Chasing High Premium with Wrong Stocks

The error: You see a stock offering $500/month premium on PMCC. The LEAP costs $2,500. 20% monthly return!

Why it’s wrong:

• High premium = high volatility = high risk
• That $2,500 LEAP could be worth $500 next month
• Stock could gap down 30% overnight
• Your 20% monthly return becomes -70% monthly loss

The fix: Focus on quality stocks with reasonable volatility. Don’t chase premium.

Mistake #8: Not Having Exit Plan

The error: You enter PMCC thinking “I’ll figure it out as I go.”

Why it’s wrong:

• LEAP will expire (do you roll? when?)
• Stock could drop 40% (do you cut losses? double down?)
• No plan = emotional decisions = losses

The fix: Before entering, decide:

• At what LEAP loss % do I exit? (40%? 50%?)
• When do I roll LEAP? (6 months remaining? 3 months?)
• What’s my profit target? (100% on LEAP? 50%?)

Key Takeaways

What You’ve Learned:

PMCC Mechanics:

• Buy deep ITM LEAP (12-18 months, 0.75-0.85 Delta) as “synthetic stock”
• Sell short-term calls against LEAP (same as covered calls)
• Capital efficiency: 60-80% less capital than traditional covered calls
• Returns: 8-12% monthly on deployed capital (vs. 2-3% for traditional CC)

Capital Efficiency:

• Traditional CC: $15,000 per position
• PMCC: $3,000 per position
• Same premium collection, 5:1 leverage
• Remaining capital for diversification or safety buffer

LEAP Selection Criteria:

• Expiration: 12-18 months optimal
• Strike: Deep ITM (0.75-0.85 Delta minimum)
• Liquidity: Open interest >100, spread <5%
• Cost structure: Minimize extrinsic value (theta cost)

Short Call Selection:

• Strike: ≥ (LEAP strike + LEAP cost/100)
• Delta: 0.30-0.45 (slightly more aggressive than traditional CC)
• Time frame: 30-45 days standard
• Target premium: ≥ (LEAP theta cost × 1.5)

When PMCC Wins:

• Limited capital accounts ($10k-50k)
• Capital efficiency focus
• Non-dividend stocks
• High IV environments
• Tax-deferred accounts

When Traditional CC Wins:

• Dividend income focus
• Large accounts ($250k+)
• Conservative risk tolerance
• Volatile/uncertain markets
• Long-term holding intent

LEAP Management:

• Roll at 3-6 months remaining
• Roll if Delta drops below 0.70
• Consider exit if down 50%+
• Track theta cost monthly

Early Assignment Risks:

• PMCC creates unique early assignment complications
• Must exercise LEAP to deliver shares if short call assigned
• Need cash equal to LEAP strike × 100 available
• Monitor ITM positions near ex-dividend dates
• Know your broker’s policy on automatic exercise

Unique PMCC Risks:

• LEAP can expire worthless (stock can’t)
• Theta decay on LEAP ($200-300/month)
• Liquidity risk on LEAPs
• Spread costs on entry/exit/rolls
• Vega risk from IV changes

Position Sizing:

• Max 5-8% per position (more conservative than traditional CC)
• Portfolio max: 60-70% in PMCC, keep 30-40% buffer
• Need cash for LEAP exercise (strike × $100)

Tax Complications:

• Most gains short-term (ordinary income rates)
• Straddle rules may apply
• Complex record keeping required
• Best in tax-deferred accounts
• Consult tax professional for large accounts

Common Mistakes:

• Buying too short-dated LEAPs
• Selling calls too close to LEAP strike
• Ignoring LEAP Delta decay
• Running through ex-dividend
• Insufficient cash for exercise
• Over-leveraging
• Chasing high premium stocks
• No exit plan

The Reality:

PMCC is not “covered calls for poor people.” It’s covered calls for people who understand leverage, risk management, and options mechanics well enough to handle additional complexity in exchange for capital efficiency.

If you have $100,000 and want to run covered calls, traditional stock ownership is simpler and safer. If you have $30,000 and want to run 10 positions instead of 2, PMCC makes that possible - but at the cost of leverage risk, theta decay, and early assignment complications.

PMCC shines in specific situations: smaller accounts needing diversification, non-dividend growth stocks, traders who can actively manage LEAP rolling, and tax-deferred accounts where complexity doesn’t create tax headaches.

The strategy requires discipline. You must:

• Track LEAP theta decay and ensure short calls offset it
• Roll LEAPs every 12-18 months (transaction costs)
• Monitor Delta and roll down if it drops
• Keep cash reserves for LEAP exercise
• Accept that one bad position can vaporize 100% of capital (not just lose 20-30% like stock)

Most importantly: PMCC is not a set-it-and-forget-it strategy like traditional covered calls can be. It requires active management, options knowledge, and emotional discipline. Run it well and you’ll generate excellent risk-adjusted returns. Run it carelessly and you’ll learn expensive lessons about leverage.

Start with 1-2 PMCC positions alongside traditional covered calls. Learn how LEAPs behave. Understand the theta decay. Experience a LEAP roll. Only then scale to multiple positions.

And remember: The “Poor Man” in Poor Man’s Covered Call refers to capital requirements, not sophistication required. You need to be a rich man in options knowledge to run this safely.

What’s Next:

You’ve now completed the full covered call education series - from basic mechanics through advanced strategies like the Wheel and PMCC. You understand position management, portfolio construction, Greeks, capital efficiency, and risk management.

The next step isn’t another module - it’s execution. Start small, manage carefully, track everything, and scale systematically. The difference between knowledge and profit is disciplined implementation.

Ready to start tracking your covered call portfolio professionally? Cover My Assets handles everything we’ve covered - from basic covered calls through PMCC LEAP tracking, rolling management, and tax reporting.

---

This is Module 10 of our comprehensive covered call education series.

← Back to Module 9: Wheel Strategy | Back to Academy Home | Start Your Free Trial →