The poor man's covered call, measured

What a poor man's covered call is

A poor man's covered call (PMCC) replaces the 100 shares in a covered call with a deep in-the-money long-dated call, often called a LEAP. You buy the LEAP, then sell shorter-dated calls above the market against it, month after month. The LEAP costs a fraction of the shares, so the premium collected is a larger share of the money tied up.

Underneath it is a diagonal spread: long a call far out in time, short a call near in time at a higher strike. It is a bullish position. Most of its result comes from the LEAP's move, not from the calls sold against it.

How we tested it

We replayed PMCC campaigns on QQQ and SPY from 2022: buy a roughly 0.75-delta 12-month LEAP at the ask, sell a roughly 0.30-delta 30 to 45 day call at the bid each cycle for six cycles, buy back any short call that finished in the money, and sell the LEAP at the bid at the end. The comparison was the LEAP alone and stock bought in the same delta-matched amount.

What the history says

The PMCC lost to the plain stock comparison in most campaigns. It beat delta-matched stock in 6 of 17 QQQ campaigns and 9 of 33 SPY campaigns. The short calls gave back about half of the LEAP's gain on a rising tape, and 39% to 44% of them finished in the money, more than their 0.30 delta implied.

In 2022, a falling year, the SPY campaigns lost while the delta-matched stock was slightly positive. So the structure gave up upside in the good years and did not protect in the bad one. The sample also leaned bullish, because many start dates had no LEAP near the target delta, and it still lost to stock.

What that means

The PMCC is levered long beta with a cap that tends to bind exactly when the trade goes well. The calls you sell are cheap relative to the moves an index makes in a rising market, the same reason call credit spreads lost on this tape. If the attraction is lower capital per position, the leverage is the attraction, and the guide on position sizing explains why leverage needs its own budget.

If you want the covered call payoff, the covered call versus cash-secured put guide explains why those two are the same trade. If you want long exposure, the measured question is whether selling calls on top beats not selling them, and in our sample it did not.