What Is a Poor Man’s Covered Call?

The poor man’s covered call strategy (PMCC) is a fantastic method if you want to trade options for income with minimal capital requirements. The PMCC strategy is a bullish trade; therefore, you should use this strategy when you believe an underlying stock will increase in price.

Selling Covered Calls

The traditional covered call strategy involves owning 100 shares of stock and then selling a call option against them to collect a premium. You simply promise to sell your shares to the call buyer for a cash premium.

However, 100 shares of some stocks are a big chunk of change. Therefore, the poor man’s covered call is an excellent alternative if you want to trade a similar strategy with much less money.

How to Enter a Poor Man’s Covered Call (PMCC)

You can construct the PMCC strategy by purchasing a deep ITM (in the money) call and selling a shorter dated OTM (out of the money) call against it.

Many traders buy the long call with 300+ days until expiration (DTE) with a delta of 70 or higher. The delta determines how many shares the call option currently simulates, meaning a 70 delta call option is like owning 70 shares.

The short call can be within any expiration date shorter than the long one. However, option selling educators like Tastytrade prefer to sell options with an expiration of around 45 days until expiration (DTE). Tastytrade conducts various backtests and concludes that 45 DTE is the optimal timeframe to sell options.