The Strategy: LEAPS + Short Calls = Income

Selling covered calls against LEAPS (formally called a diagonal spread or poor man's covered call) is a strategy that generates recurring income on a fraction of the capital required for traditional covered calls.

You own a deep in-the-money LEAPS call. You sell short-dated out-of-the-money calls against it each month. The LEAPS acts as your "shares" and the short calls generate premium income.

Setting Up the Trade

Step 1: Buy the LEAPS (your long leg)

Target a deep ITM call with delta 0.80+ and expiration 18-24 months out.

Example: GOOGL at $180. Buy the $140 strike LEAPS call, January 2028, for $48. Delta: 0.83.

Step 2: Sell the short call (your income leg)

Sell a near-term OTM call with 30-45 days to expiration and delta 0.20-0.30.

Example: Sell the $190 strike call, 35 days out, for $3.20. Delta: 0.25.

Net position: Long the $140 call (LEAPS), short the $190 call (monthly). Net debit: $44.80 ($4,480 per spread).

The Math on Monthly Income

Collecting $3.20 per month is $320 on a $4,480 investment—7.1% monthly. Realistically, a sustainable average is $200-280 per month after accounting for challenging months. Annualized, that is 54-75% return on capital before adjusting for LEAPS decay and rolling costs.

Choosing Your Short Call Strike

The short call strike balances income against upside risk:

| Short Call Delta | Probability OTM | Typical Premium | Trade-off | 0.15~85%LowerRarely challenged, less income 0.20-0.25~75-80%ModerateGood balance for most traders | 0.30-0.35 | ~65-70% | Higher | More income, more management needed |

Critical rule: Your short call strike must be above your LEAPS breakeven (LEAPS strike + net premium paid). If your LEAPS breakeven is $188 and you sell a $185 call, an assignment at $185 locks in a loss.

Monthly Management Playbook

Scenario 1: Short call expires worthless (most common) Stock stays below your short strike. You keep the full premium. Sell a new call for the next cycle.

Scenario 2: Stock approaches your short strike You have two choices:

  • Roll up and out: Buy back the short call and sell a new one at a higher strike with a later expiration. Try to do this for a net credit or at break-even.
  • Close both legs: If the stock has rallied significantly, close the entire position for a profit.

    • Scenario 3: Stock drops sharply Your short call expires worthless quickly (good). Your LEAPS loses value (bad). You can sell a new call at a lower strike or wait for a bounce before selling the next call. Avoid selling the short call at a strike below your breakeven.

    Scenario 4: Short call goes in-the-money at expiration If assigned, you effectively sell at the short strike price. Close the LEAPS simultaneously. Calculate your net profit: (short strike - LEAPS strike) - net premium paid for the LEAPS + total premiums collected from all short calls.

    Real Performance Expectations

    After accounting for:

  • Months with lower premiums
  • Occasional rolls that reduce or eliminate income
  • LEAPS time value decay
  • One or two losing months per year

    • A realistic annualized return is 25-45% on capital deployed. This is still exceptional compared to traditional covered calls (8-15% typical).

    Scaling the Strategy

    Build a portfolio of 3-5 PMCC positions across different stocks and sectors. Total capital: $20,000-$30,000 for four positions versus $80,000+ for traditional covered calls on the same stocks.

    OptionsPilot's covered call finder identifies optimal short call strikes based on your desired delta and premium target, then tracks your positions as you sell new calls each month.

    Key Takeaways

  • Always keep short strikes above your LEAPS breakeven
  • Sell calls at 30-45 DTE for optimal theta capture
  • Roll early when challenged rather than waiting until expiration
  • Diversify across 3-5 positions to reduce single-stock risk