Poor Man's Covered Call Calculator: How to Set Up a PMCC with LEAPS
The Poor Man's Covered Call might have the worst name in options trading, but it's one of the best strategies for traders who want covered call income without tying up $15,000-$50,000 in stock. Instead of buying 100 shares, you buy a deep in-the-money LEAPS call — and sell short-term calls against it, just like a traditional covered call.
I run PMCCs on AAPL, MSFT, and AMZN in my own account. The capital efficiency is absurd: $800-$1,200 controls the same position that would require $17,000-$20,000 in stock. The tradeoff is complexity, and that's what this post covers — every calculation, every scenario, every risk.
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What Is a Poor Man's Covered Call?
A PMCC (also called a diagonal spread or synthetic covered call) has two legs:
The LEAPS replaces the 100 shares of stock. Because it's deep ITM (0.80+ delta), it moves nearly dollar-for-dollar with the stock. The short call generates income, just like a traditional covered call.
Why it works: A 0.80 delta LEAPS call on AAPL costs about $8,000-$12,000 instead of $17,000-$23,000 for 100 shares. You're getting 80-90% of the stock's movement for 40-60% of the capital.
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How to Select the LEAPS Strike
This is where most PMCC guides get lazy and just say "buy deep ITM." Here are the specific criteria:
Delta: 0.80 or Higher
The LEAPS needs to behave like stock. At 0.80 delta, your long call gains $80 for every $1 the stock moves up. Below 0.75 delta, you start losing too much directional exposure and the strategy breaks down.
Expiration: 6-12 Months Out (Minimum)
LEAPS are defined as options with more than 1 year to expiration, but for PMCCs, anything 6+ months works. The further out, the less time decay you'll experience on the long leg — but the more expensive it is.
Sweet spot: 9-12 months out. You get slow theta decay (LEAPS lose roughly $0.02-$0.05/day at this timeframe) while keeping the capital cost manageable.
Strike Selection Rule
Your LEAPS strike should be deep enough ITM that the extrinsic value is low relative to the total premium. Here's the test:
``` Extrinsic Value = LEAPS Price − Intrinsic Value Extrinsic % = Extrinsic Value / LEAPS Price ```
Target: Extrinsic value should be less than 15% of the LEAPS price. Lower is better — you're paying for time value that will eventually decay.
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How to Select the Short Call
The short call is your income engine. Here are the criteria:
Delta: 0.25-0.35 (Typically 0.30)
A 0.30 delta call has roughly a 70% probability of expiring OTM — meaning you keep the premium 70% of the time. Going lower (0.20 delta) means less premium per cycle but higher win rate. Going higher (0.40 delta) means more premium but more frequent management.
DTE: 30-45 Days
This is the theta decay sweet spot. Options lose time value fastest in the final 30-45 days, but the rate accelerates dangerously in the final week. By selling at 30-45 DTE, you capture the steepest part of the decay curve.
The Critical Rule: Short Call Strike ABOVE LEAPS Strike
Your short call strike must be higher than your LEAPS strike. If the stock rallies past both strikes, this ensures you have a profit — the width between the strikes is your upside.
If you accidentally sell a short call below your LEAPS strike, you create a scenario where you can lose money even if the stock goes up. Don't do this.
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Complete AAPL PMCC Example
AAPL is trading at $232.50. Let's build a PMCC.
Step 1: Buy the LEAPS
| Detail | Value |
Step 2: Sell the Short Call
The Numbers
``` Net investment = $4,980 − $385 = $4,595 ```
Compare this to a traditional covered call on AAPL:
| | Traditional Covered Call | PMCC |
That annualized number looks insane — and it is, if everything goes perfectly. The real return is lower because you won't win every cycle and the LEAPS loses value over time. But the capital efficiency advantage is undeniable.
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The BCI (Break Cost at Initiation) Formula
Before entering a PMCC, calculate your break-cost — the LEAPS price point where you break even even if the strategy produces zero income.
``` BCI = LEAPS Premium − (Short Call Strike − LEAPS Strike) BCI = $49.80 − ($240 − $190) = $49.80 − $50 = −$0.20 ```
A negative BCI means that even if AAPL rallies past $240 and your short call is assigned, you still profit. Here's why:
If assigned on the short call, you effectively "sell" AAPL at $240 via your spread. Your profit would be:
``` Assignment Profit = (Short Call Strike − LEAPS Strike) × 100 − LEAPS Premium × 100 = ($240 − $190) × 100 − $49.80 × 100 = $5,000 − $4,980 = $20 (plus the $385 premium you collected) Total profit if assigned = $405 ```
A negative BCI is ideal — it means you have a profit in all scenarios where AAPL stays flat or goes up. A positive BCI means you need to collect enough premium over multiple cycles to cover the cost, which adds risk.
Rule of thumb: Only enter a PMCC when BCI is less than $0.50. Ideally negative.
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Scenario Analysis: What Happens in Every Outcome
Scenario 1: AAPL Stays at $232.50 (Flat)
Short call expires worthless. You keep the $385 premium.
``` P&L on short call: +$385 LEAPS value change: Approximately −$150 to −$200 (35 days of theta at ~$5/day) Net P&L: ~+$185 to +$235 ```
You profit, but less than the $385 credit because the LEAPS decayed. Sell another short call next month.
Scenario 2: AAPL Drops to $220 (−5.4%)
Short call expires worthless (+$385). But the LEAPS lost value.
``` LEAPS delta is 0.84, so LEAPS lost roughly: $12.50 × 0.84 × 100 = $1,050 Plus theta decay: ~$175 Total LEAPS decline: ~$1,225 Net P&L: $385 − $1,225 = −$840 ```
This is the primary risk of a PMCC: the LEAPS can lose significant value on a downturn. The short call premium only partially offsets this. You're still directionally bullish and exposed to downside — the PMCC doesn't eliminate stock risk, it just reduces the capital at stake.
Scenario 3: AAPL Rallies to $245 (Above Short Call)
This is the management scenario. Your short $240 call is now ITM.
Option A: Close the entire spread. Your LEAPS is worth approximately $60.50 (gained from stock rally + still has remaining time value). Your short call is worth approximately $6.20. Close both.
``` LEAPS profit: ($60.50 − $49.80) × 100 = $1,070 Short call loss: ($6.20 − $3.85) × 100 = −$235 Net P&L: $1,070 − $235 = $835 ```
Option B: Roll the short call up and out. Buy back the $240 call for $6.20, sell the $250 call 30 days out for $4.10. You "spend" $2.10 to move your ceiling from $240 to $250. If AAPL keeps rallying, you have more room.
Option C: Let the short call expire/get assigned. If you don't have 100 shares, your broker will exercise your LEAPS to cover the assignment. Net result:
``` Proceeds from assignment: ($240 − $190) × 100 = $5,000 Cost of LEAPS: $4,980 Short call premium: $385 Net profit: $5,000 − $4,980 + $385 = $405 ```
Profitable, but you gave up the upside above $240. This is the same cap that exists with traditional covered calls — you trade upside for income.
Scenario 4: AAPL Gaps Down Hard to $200 (−14%)
This is the nightmare scenario.
``` LEAPS decline: Roughly $32.50 × 0.84 = $2,730 (delta will decrease as it moves toward the money) Realistic LEAPS value: ~$22.00 (lost about $27.80 of value, or $2,780) Short call: Expires worthless, +$385 Net P&L: −$2,780 + $385 = −$2,395 ```
You lost $2,395 on a $4,595 net position. That's a 52% loss. Painful, but compare to owning 100 shares: ($232.50 − $200) × 100 = $3,250 loss on $22,865 invested = 14.2% loss. In dollar terms, the PMCC lost less ($2,395 vs $3,250), but in percentage terms, much more.
This is the key tradeoff: PMCCs are capital-efficient but have higher percentage drawdowns. Size accordingly.
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How Much Capital Do You Need for a PMCC?
Realistically, you need enough to buy one LEAPS contract plus a buffer for management:
| Stock | Approximate LEAPS Cost (0.80+ delta) | Traditional 100 Shares |
For a $10,000 account, you could run 1-2 PMCCs on AAPL or AMZN with proper position sizing. For a $25,000 account, you could diversify across 3-4 names.
Minimum recommended account size: $5,000. Below that, a single LEAPS ties up too much of your capital and you can't properly diversify.
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PMCC Management with OptionsPilot
OptionsPilot's covered call calculator works for traditional covered calls, and the same P&L logic applies to PMCCs. Use it to:
The AI strike finder can identify the best short call strike based on your desired probability of profit and target monthly income — saving you 15 minutes of manual screening each cycle.
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FAQ
How much capital do you need for a PMCC?
A single PMCC requires the cost of one LEAPS contract, typically $3,000-$12,000 depending on the stock price and how deep ITM you go. For AAPL at ~$230, expect $4,500-$6,000. This compares to $23,000 for 100 shares. Minimum recommended account size is $5,000.
What delta should you use for PMCC LEAPS?
Buy LEAPS with 0.80 delta or higher. At 0.80 delta, the LEAPS moves $80 for every $1 move in the stock, closely mimicking share ownership. Below 0.75 delta, you lose too much directional correlation and the strategy becomes more of a speculative diagonal than a synthetic covered call.
Is a PMCC better than a covered call?
A PMCC is more capital-efficient (70-80% less capital) and generates higher percentage returns per cycle. A traditional covered call is simpler, has no LEAPS decay risk, and doesn't expire. PMCCs are better for smaller accounts or traders who want to run the strategy on expensive stocks. Traditional covered calls are better for long-term buy-and-hold investors who want to generate supplemental income.
What happens if the stock drops below my LEAPS strike?
Your LEAPS becomes out-of-the-money, loses value rapidly, and no longer moves closely with the stock (delta drops below 0.50). This is the worst-case scenario for a PMCC. You can continue selling short calls against it for small credits, but recovering the LEAPS cost becomes difficult. This is why position sizing matters — never commit more than 15-20% of your account to a single PMCC.
Can you get assigned on a PMCC short call?
Yes. If your short call is in-the-money at expiration, you may be assigned. Your broker will exercise your LEAPS to cover the assignment, resulting in a profit equal to (Short Strike − LEAPS Strike) − LEAPS Cost + Short Call Premium. With a negative BCI, this is always profitable. The risk is missing further upside, not a loss.