Imagine you want to collect the rent on a luxury apartment in the heart of Madrid or New York, but you don’t have the million euros it costs to buy it. The solution would be to lease that apartment yourself long-term at a fixed price and then sublet it by the night for more. Well, that’s exactly what we’re going to do today in the stock market. It’s called the Poor Man’s Covered Call, though there’s nothing poor about it — it’s the Covered Call for the Efficient Investor.
The problem with the traditional Covered Call
We all know the Covered Call is the go-to strategy for generating income with stocks. You own shares, you sell call options against them and you collect premiums. Fantastic. But it has one huge problem: the cost of entry.
If you want to run a Covered Call on Amazon, you need to buy 100 shares. At $180 a share, that’s $18,000. If you want to do it with Nvidia, get your wallet ready, because you’ll need a lot more capital. For many investors, that barrier to entry is simply too high.
The solution: swap shares for LEAPS
The trick behind this strategy is to replace the expensive shares with something far cheaper that behaves almost the same: a LEAPS option. LEAPS stands for Long-Term Equity Anticipation Securities — basically, a call option with a very distant expiration, a year or more out.
Instead of spending $18,000 on Amazon shares, we buy an Amazon call that expires a year or more from now and is deep in the money. If we pick an option with a delta of 0.80, it means that if Amazon rises $1, our option rises $0.80. We benefit almost the same as the shareholder, but having paid far less.
Once we have our “fake share package” (the LEAPS), we do the second part: sell short-term calls against it, just as if we owned the real shares. We sell a 30-day call, collect the premium and keep it. Month after month.
An example with real numbers: Amazon
Amazon trades at $180. Let’s compare the two options:
Traditional method (Covered Call)
- You buy 100 shares — an investment of $18,000
- You sell a monthly call and collect $200 in premium
- Return: $200 on $18,000 = 1.1% per month
Poor Man’s Covered Call
- You buy a 12-month LEAPS call, strike $140 (deep ITM) — cost of $5,000
- You sell the same monthly call and collect the same $200 in premium
- Return: $200 on $5,000 = 4% per month
You’ve quadrupled your return on invested capital by making exactly the same selling trade. You control the same 100 Amazon shares, but you’ve only put up $5,000, not $18,000. That’s the power of leverage properly understood.
Technically: a Diagonal Debit Spread
What we’re building is what is technically called a Diagonal Debit Spread. We buy a long-term option (the LEAPS) and sell a short-term option with a different, higher strike. The difference in expirations and strikes creates the diagonal.
The two enemies of this strategy
The golden rule: burn it into your memory
The distance between the strike you buy (the LEAPS) and the strike you sell (the short call) must be GREATER than the price you paid for the LEAPS. If you follow this rule, you’ll never lose money even if the stock rises to infinity.
In our example: we bought the LEAPS at strike $140 for $5,000 ($50 per share). If we sell calls with a strike of $200, the distance between strikes is $60 — greater than the $50 we paid. So even in the maximum-upside scenario, we come out ahead.
How to set it up step by step
Let’s look at how to configure this strategy on the ProRealTime platform:
Step 1: The long leg (the share substitute)
- Look for distant expirations — more than 365 days
- Look for a delta of 0.80 or higher — this is usually a strike fairly deep in the money
- Buy that LEAPS call — in our example, around $5,000
Step 2: The short leg (the rent you collect)
- Near-term expiration — between 30 and 45 days
- Out-of-the-money strike with a delta of around 0.30 — low odds of being touched
- Sell that call — in our example, you collect around $200
Usually, the broker will detect that you own the LEAPS and let you sell the short call using it as collateral, without asking you for more money. You’ve now built your income-generating machine at a 70% discount on capital.
Monthly management
- If the stock rises slowly or stays sideways — you keep the premium and repeat the following month
- If the stock rises sharply — you can roll the short call to extend the position
- If the stock falls sharply — your maximum loss is capped at what you paid for the LEAPS ($5,000 in our example), whereas the shareholder can lose the full $18,000 if the company goes bankrupt
The power of diversification
This is the advantage that changes the game most for small accounts. With the $18,000 that previously only covered a single Covered Call on Amazon, you can now run this strategy on Amazon, Google and Apple at the same time. Diversification and firepower with the same capital.
Poor Man’s Covered Call rules
Only with solid companies that have a long-term bullish trend — never with junk stocks
LEAPS with an expiration of more than 12 months and a delta of 0.80 or higher
Short call at 30-45 days with a delta of around 0.30
Golden rule: distance between strikes GREATER than the cost of the LEAPS
Requires monthly monitoring — it’s not “buy and forget”
Leverage is a double-edged sword — never trade money you can’t afford to lose
Conclusion
The Poor Man’s Covered Call is a powerful tool for accounts that want to play in the big leagues without big-league capital. You swap shares for LEAPS, collect the same monthly premiums and multiply your return on invested capital. It’s not magic — it’s financial engineering well applied. That said, respect the golden rule, pick solid companies and keep monitoring month after month. Whoever masters this strategy has an income-generating machine that many shareholders would envy.
