The covered call is wonderful, but it has one barrier: you need to own 100 shares, which can cost thousands. The poor man’s covered call is a clever workaround that mimics the same trade for a fraction of the cash.
Think of it as leasing a house instead of buying it outright, and then subletting a room. You control the house for far less money, and you still collect rent from your tenant.
A long call stands in for the shares
Instead of buying 100 shares, you buy one deep in-the-money, long-dated call, often called a LEAP. Because it is deep in-the-money, it moves almost like the stock itself, but it costs a fraction of buying the shares outright. That long call is your leased house. Then, just like a normal covered call, you sell shorter-dated calls against it and collect premium, your rent.
The two ways it plays out
It works much like a covered call. If the stock stays below the short call’s strike, that call expires worthless and you keep the rent, then sell another. If the stock rises above the strike, the gain on your long call helps cover what you owe on the short one, and you pocket the difference. You have earned income while risking far less capital than owning shares would require.
Where the catch is
The trade-off is that your leased house has an expiration date, and it costs money to hold. Your long call slowly loses time value, and if the stock falls hard, the long call can lose value faster than a rally in the shares would. It also takes more care to manage than a plain covered call. It is a capital-efficient tool, not a free lunch, so learn the basic covered call first.
Choose a long call that is deep in-the-money and far out in time, so it behaves as much like the stock as possible. The closer your leased house acts like an owned one, the more this trade feels like a real covered call.
- A poor man’s covered call replaces 100 shares with one deep in-the-money, long-dated call, then sells calls against it.
- It mimics a covered call for far less capital, collecting rent from the short calls.
- The catches are time decay on the long call and more active management, so master the plain covered call first.
This article is educational and is not investment advice. Options involve risk, including the possible loss of principal. Examples and premiums shown are illustrative and change with the market. Practice with paper trading before committing real money.