Poor Man's Covered Call Explained - Full Example

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Poor Man Covered Call
A "Poor Man’s Covered Call" is a Long Call Diagonal Debit Spread that is used to replicate a Covered Call position. The strategy gets its name from the reduced risk and capital requirement relative to a standard covered call.
Directional Assumption: Bullish
Setup:
- Buy an in-the-money (ITM) call option in a longer-term expiration cycle
- Sell an out-of-the-money (OTM) call option in a near-term expiration cycle
The trade will be entered for a debit. It’s important that the debit paid is no more than 75% of the width of the strikes.
Example:
Stock at $100
Purchase (Expiration 2) 90 call for $15
Sell (Expiration 1) 110 call for $5
Net debit = $10.00 on a 20-point-wide long call diagonal spread
Ideal Implied Volatility Environment: Low
Max Profit: The exact maximum profit potential cannot be calculated due to the differing expiration cycles used. However, the profit potential can be estimated with the following formula:
Width of call strikes - net debit paid
How to Calculate Breakeven(s): The exact break-even cannot be calculated due to the differing expiration cycles used in the trade. As a rough estimate, the break-even area can be approximated with the following formula:
Long call strike price + net debit paid
Trade approach:
A Poor Man’s Covered Call is a fantastic alternative to trading a covered call. In smaller accounts, this position can be used to replicate a covered call position with much less capital and much less risk than an actual covered call.
The setup of a poor man’s covered call is very important. If we have a bad setup, we can actually set ourselves up to lose money if the trade moves in our direction too fast. To ensure we have a good setup, we check the extrinsic value of our longer dated ITM option. Once we figure that value, we ensure that the near term option we sell is equal to or greater than that amount. The deeper ITM our long option is, the easier this setup is to obtain. We also ensure that the total debit paid is not more than 75% of the width of the strikes.
We never route poor man’s covered calls in volatility instruments. Each expiration acts as its own underlying, so our max loss is not defined.
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#TradingOptions #PoorMansCoveredCalls #PMCC
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.
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[@JakeBroe]

Give this video a LIKE to support my channel! Also check out my entire playlist on Trading Options here! kzbin.info/aero/PLscTZuOqKWIxSZzy4ObKWDznEsCot_1HU

[@brubakertx]

I watched about 5 different Poor Man's Covered Calls videos. You're was by far, the best one! Too bad I didn't watch your video first....lol. I added you my Subscribed list! Thanks!

[@JakeBroe]

Awesome! Welcome to the channel Bruce! Great to have you with the channel!

[@aarniella]

Totally agree! Excellently explained video.

[@extrabarba]

If you use a high delta in your leap that much time out and the stock price goes up as expected, that leap can become illiquid, you have to be carefull.

[@tempqwerty923]

I love this guy. He explains everything ground up with so much clarity, never over the top and doesn’t sound fake, love the little enthusiasm in the beginning of his videos - so natural . ❤

[@alexmartins8182]

You're right that Amazon shares skyrocketed, and in that case, it would have been better to own the shares than to buy "leaps." However, that's not always going to happen (almost never), so I prefer to make many hits rather than aiming for a home run. Thank you for your video.

[@nsharma99]

Dude when Amazon dropped to $90/share back in Dec 2022 I just sat on my hands… so much regret. I had plenty of capital to invest too.

[@cavaradossi7761]

Best explanation that I've heard and I've been through a bunch. Clear, concise, no extraneous chatter or confusing information or tangents. Well done!

[@afkshane]

You explained it so much better than the last PMCC video I watched. Thank you.

[@joh2744]

You are the only youtuber I'm learning something from. Keep your good works!

[@michaelramos3701]

Loving the videos, I learned so much watching your option videos!! Keep them coming...

[@kanegs1]

Probably the best explanation of PMCC's I've heard, well done Jake! You explain things the way everyone is wanting to hear, straight to the point with great examples, love it! Thanks Jake!

[@JakeBroe]

Thanks kanegs! I appreciate that!

[@taylorl2673]

Hi Jake! Thanks for all the amazing content! I love your videos, no bs, straight to the point, and always with great real examples. I guess i unknowingly did poor man's covered call on one of my positions, but I did a 6 months leap against my 18 months leap, lol.

[@sk_77]

Jake - Can't thank you enough man... the best video and explanation on PMCC. Appreciate it!

[@chunktime759]

Fantastic collection of videos. So in formative. Love learning from you.

[@wilbertmatherson3897]

I really appreciate the way you explain the PMCC, you are a great tutor. Thanks

[@kamaujla8341]

Thanks so much Jake, you have no idea who many videos I've watched on PMCC to understand what would happen (scenarios) if the Long/Short are exercised, no one has explained this b4. I watched this video a couple of time to let it sink in, but finally understand my various scenarios as to what would happen or what i could do.

[@shady80s22]

Man I have watched many of these type of videos but this one is the one that really drove it home for me because of the extensive detail to everything. Ty sir subscribed

[@JakeBroe]

Awesome! Welcome to the channel Shady 80's! Great to have you with us!

[@justinlucas1127]

You are awesome, Jake. Appreciate you taking the time to share your knowledge and helping people understand trading techniques. Great explanation!

[@JakeBroe]

Thanks Justin! I'm just happy if people find it and it helps people understand. Cheers!

[@brianchill7443]

Thank you Jake! This was an excellent instructive video and most helpful to me! I’m going to look through your playlist for an example of a LEAPS that goes through a stock split. If you don’t have one, it would be great to see your explanation. Also, I remember you stating you were getting close to exiting the military. I am retired Army. I wish I would have had this knowledge while I was still in the military. Thank you again!

[@andreunz]

Dear Jake great video as always. Given this has happened to me on selling short covered calls, when the price of the stock goes down, the truth is that: the option will follow down and, you can make very little money ( if at all), if you still want to sell calls outside of the money. In that case in fact none will buy them... So in order to make money (again) again on the short call sales, you do have to hopw, that the 120US$ gos up to at least the 130US$...

[@lisadawley]

You helped me make my first covered call and I earned $168 with no risk...studying this video today to make my first poor man's covered call. Great job explaining detailed steps!

[@lisadawley]

When buying the LEAP, is it buy leap (buy to close) and sell the call (sell to open)?

[@JakeBroe]

That's awesome Lisa! When you buy the LEAP, you are buying to open. Once it is in your account, you can then sell to open a call against it.

[@kiarathebabyrottweiler4279]

What a great detailed explanation of the PMCC mechanics!! I like the way you run through the 3 possible outcome scenarios (with the numbers) and then the risks to keep in mind. Very helpful! Thank you Jake!

[@joshd.6820]

The only thing that was not out-right explained, is in the 3rd scenario, you obviously cannot continue to sell puts because the price has fallen below the LEAPS. if you sell a put and it gets assigned, you could lose big on the LEAPS. You have to wait for the price to come back up. This could defeat the purpose of PMCC's but that's the risk...or at least how I understand it.

[@that.alaskan.realtor]

@@joshd.6820 you sell covered calls continuously. You have to wait for the price to come back if you held 100 shares anyways. This strategy is used on companys you WANT to own regardless of short term fluctuations

[@possum1955]

Thanks the best explanation I have found so far

[@OlegScherbina]

Thanks Jake, I learn from your every video - your options game explanations are the best on KZbin.

[@JakeBroe]

Thanks so much Oleg! I greatly appreciate the support!

[@jasonnowicki5066]

best ive heard so far. very detailed at endgame situations

[@JakeBroe]

Thanks jason! Cheers!

[@jasonmcdowell9195]

Great Video, really learned alot on something I had never heard of before.

[@JustinTrader85]

What a great, intelligent presentation. Many thanks

[@zsynhgd]

very nice! Great video. It is very helpful!

[@DrShaka]

Great video. Thanks for the explanations!!

[@JohnShoultz-vt7ev]

I found this video extremely helpful as I'm building my option strat, I will be taking a own the 100 approach, but understanding all the options and math will help. Ty

[@nitinhebbar]

I don't know why Jake stopped making video of this genre. I used to watch all of his trading videos. He had since switched to covering Ukraine-Russia war.

[@mt-fy8qf]

Thank you. Good video!

[@deadleague3618]

Daily education completed, thanks Jake

[@JakeBroe]

Thanks deadleague! Cheers!

[@ACR4008]

16:19 What I have done before the short call reaches expiration (and assignment) is just close both legs of the position. You sell the LEAPS but with it you sell any remaining extrinsic value (which you would lose with exercising).

[@newbielives]

Beautifully explained

[@MorganBrown]

My biggest issue with the PMCC (which I trade religiously) is the lack of liquidity of the LEAP. Even on SPY, a typical LEAP may have very low daily volume. I once rolled a LEAP on TLT and had to sell it for less than its intrinsic value! Sounds like a sweet trade to take the other side of, if you are well capitalized

[@hassanem8731]

Thank you so much this makes so much sense now

[@JakeBroe]

Glad I could give a clear explanation! Cheers Hassane!

[@marksmang3491]

Excellent! Thank you Jake

[@deviambati3805]

Thank you Jake for a detailed explanation of poor man covered call. I will try and see how it goes. Greatly appreciated for your time and effort to bring to beginners.

[@JakeBroe]

Thanks for watching Devi! Best of luck to you!

[@avieda]

thanks for the video. real good info about assignment of leaps. its a bit complicated. so its better not to wait for expiration when using leaps, but to roll all the time the short call. until you have to roll the leaps it self.

[@JakeBroe]

Indeed, it is a bit complicated but a really interesting investing strategy! Cheers Avi!

[@jimmyalan9]

good job on the video Jake....

[@billassim9014]

I watched other video s on this, Jake by comparing to a regular covered call, I understand, thanks

[@JakeBroe]

Thanks for watching Bill! Cheers!

[@cryptoenthusiast4999]

Excellent video. The best explanation of PMCC to date.

[@JakeBroe]

Thanks Papillon! I appreciate that!

[@aurinator]

Apparently these are also known as "Synthetic Covered Calls" in more of an academic setting, and it makes sense but I too learned it as a PMCC.

[@ciblll1]

That was perfect explanation thank you

[@JakeBroe]

This was a perfect comment! Cheers Bora!

[@xianxiong3440]

The only risk for this strategy is that the market goes in the opposite direction of your long option all the way until expiration, or you are being greedy and sell options that will lose money in total if those short options get assigned at expiration date.

[@MorselOfBread]

22:50 6) If stock price goes way down below your break even and you keep selling cc, you can be assigned for a loss. If the stock goes way way down below the leap strike, you're fucked.

[@eric6616]

Thanks for the video also, I really appreciate the wall paper of Mount ARARAT of Armenia.

[@radhsri]

One of the best explanations of PMCC..

[@JakeBroe]

Thanks Srini! Cheers!

[@edod2997]

Nice explanation. This is the first one of your videos I've seen and I'll be checking out more. (I recognize that flag--we may be neighbors).

[@JakeBroe]

Thanks edod! Welcome to the channel! Great to have you with us!

[@TwoStupidGuysTradeStocks]

Nice timing Jake! I just opened my first 2 pour man’s covered call positions this week! 🤞

[@JakeBroe]

Nice! That's pretty exciting. $$$

[@TwoStupidGuysTradeStocks]

@@mikaelmorrell-stinson8731 nah, couldn’t find any stock tips on the first page…. Leaving my typo for the ages. Lol

[@andymerkel6955]

@@TwoStupidGuysTradeStocks ha ha, I thought the mispell was a deliberate play on words referencing the author's paypal "buy me a beer"....

[@TwoStupidGuysTradeStocks]

@@andymerkel6955 I like it. We will go with that… it was a total brain fart. We named our channel appropriately!

[@andymerkel6955]

@@TwoStupidGuysTradeStocks cool, I'll check out your channel...

[@victormtz16]

I was wondering what the benefit of leaps deep in the money was. Thank you!

[@DividendBuster]

Hey Jake. Loved this video explanation from 2 years ago. I have followed your channel for about a year now (on the options videos). THANK YOU for your service!!!! One question I did have was... towards the end of the long call exp. date, assuming I have sold short calls for premium, how do I calculate how much I can sell the long call back for? Just trying to find out potential total premiums/$ earned for a PMCC. All videos i see on youtube explain buying the long call, selling short calls for premium, maintaining both contracts...but I dont see any videos giving theoretical examples of the potential that can be made in total...so closing the long call portion is still a mystery...any helpful words you can offer would be greatly appreciated.

[@MT-qq1rq]

Good info Jake. I bought a LEAP on CRWD 2 weeks ago and today my short call on CRWD is ITM so I decided to close on both positions which may not have been a good idea since the leap still have a lot of time value left. But profit is profit and I'll get back in CRWD when it pullback again.

[@JakeBroe]

Nobody ever made a mistake by taking profit! No worries Mike!

[@CesaumBalboa]

Great video! One more subscribed

[@jamessamuel758]

Love this channel

[@JakeBroe]

Thanks James! I appreciate the support!

[@ilangosivaraman1515]

Thanks - well explained - I would request you to make a video ' PMCC for SPY' . Thanks

[@volatilenomad9854]

This is very educational and thank you for sharing. In terms of risks involved, and without veering away from the deltas you recommended, would you consider PMCC less risky than flat out Wheeling?

[@madhuvamsimachavarapu5267]

wow nice video and tutelage!

[@LiquidSion212]

Amazing video thanks for sharing

[@JakeBroe]

Thanks for watching and leaving a comment! Cheers Sion!

[@bunkerman99]

One thing worth mentioning Jake. Not saying this is the best way to do it and just for illustritive purposes. You Buy the .90 Delta call and today that is June, 23 expiry. Lets say you sell .25 delta 6x until June, '22 and they are all closed for a profit and AAPL behaves itself. As the call buyer you then have the opportunity to sell the 2023 Call in 2022 and buy the June, 2024 call for very little money to add that additional year if you so choose ($300-$400 maybe or less). By then you basis is quite abit lower and that extra year has more potential benefit than the new risk it adds. Just a thought.

[@khayyamsikander2932]

Excellent explanation 👍👍👍

[@JakeBroe]

Thanks Khayyam! Cheers!

[@deepak.finance]

This was pretty easy to understand strategy… What stocks are good for doing PMCC?

[@AJF66OG]

Good video! Do you know how Schwab treats the ITM short put? Do they automatically exercise the LEAPS option, or do they just assign you short stock?

[@TheEarth350]

Hello Jake, quick questions please, in worst case scenario if both legs are exercised, do we stiil need to have cash availabe in our account to be able to buy actual 100 shares to sell them to the buyer at strike price? Please reply. Thank you

[@jacobc522]

Does it make sense to close your short call and leap instead of letting the short call expire ITM, giving up that extrinsic value?

[@sergiydanko5676]

Nice Video Jake. Greetings from Germany

[@JakeBroe]

Thanks Sergiy! Cheers!

[@buddhavaro]

Great video! Do you buy the long term call option and sell a short-term call for premium in one trade? And then after that, you keep selling the short term calls?

[@da5731.]

To perform it, you need level 2 option? Have to do a spread, buy 2 call options at once (leap and otm)? You can roll out one part of the legs (spread)? You could limit debt the otm leg to 50%, to automize the roll out?

[@cleaner1984]

Hi Jake, @13:45 you say we can "roll up and out" but what does it mean exactly? Does it mean we buy back the short call (buy to close) and sell another call at a higher strike price? But if we are assigned, isn't it too late to buy back the short call?

[@drip6337]

I bought a leaps, and now i want to start selling calls on it but fidelity wont let me sell to open even though i have the leaps as collateral. I do have access to do vertical spreads on fidelity, do i have to open the leaps and sell the call in the same order?

[@Kusa2024]

Hey Jake in Schwab brokerage what level do I need in order to do poor man cover calls?

[@Nice-Y]

Does this require option level 4 or 3 on Fidelity?

[@tonygatto48]

Cause i have not done this i have a question..... if a stock is trading @ $22 --- and you bought a leap @24 then sold a call @24 -- then the stock rises up to lets say $25 ... would this not be a better trade then an itm leap ? I mean if its going up the vol should be the same to lower, so buying back the sht call should not get expensive... if it gets assigned you will still get the premium from the leap as its went up in price as well.... what am i missing?

[@balancingball]

Thank you Jake. This is a very nice video. Can you share how you choose stocks to do leaps on? Fundamentals? Or other factors? Thanks

[@JakeBroe]

That's a good video topic! I'll for sure be talking about LEAPs again in the future!

[@backyardevolutionwithhoxyt9657]

Does it make sense to also buy relatively cheap OTM puts (at an earlier expiration) to insure against the stock price falling too severely and taking too much value from your leap? At very low strike prices it seems like you could buy very cheap puts to at least limit your losses or will that usually end up eating a lot of your returns?

[@anthonybavry2642]

One of the better reviews on poor man's covered calls that I have seen. You simplify this strategy quite well.

[@argentinarodriguez4170]

Do you have to start buying a Leap to turn it into PMCC or can you use a CSP or a Covered Call as a PMCC?

[@lucauau]

Is intrinsic value changing during time? If I buy a 0,9 delta ITM call option.. what happens to its intrinsic value let’s say after 6 months? I presume it’s linked to the change in delta (so in the stock price). Is the ratio between inV and ExV stable? I’m basically trying to understand if it makes sense to take as granted (for all the trade length) the initial assumption

[@indonesiaforlife]

19:39 if you decided to close out the long call then you get to keep to $300 increased in value correct?

[@waltereast-z8n]

just came across this my question is strategy on the stock price decreasing...once you collect your 50% profits off your short call when you reestablish that short call are you still setting at 30 delta based off the current stock price?

[@ampiciline]

Jake , this was THE BEST explanation I have ever seen after watching 20 videos ....I just opened a Fidelity account and applied for option and i got approved for tier 1 .....so , i don't know if i am approved to do vertical option ..... can I trade two different tickets ( order ) 1) buy option call at strike price matched to delta .8 and expiration date > 12 month and 2) open to sell call at strike price match with delta 0.3 with expiration date< 30 days ........ OR , i have to use something else to execute this two orders and getting LINKED together in my fidelity brokage .....I am so confused how to put these two orders . can you help please ?

[@hvacguy542]

Having such a hard time understanding assignment so will my broker automatically sell me long leap if I get assigned and basically it’s a wash?

[@xiaobiaoxu5984]

Really liked your videos/explanation on options. I have a specific question though. In this vertical spread example, do you need to buy the long-term call and sell the short term call together in one trade? or, can you actually sell the short-term "covered" call after you already bought the (longer-term) call?

[@unexpectedgoodluck2210]

This is my question too! I have purchased my LEAPS but cannot figure out how to sell a covered call on them. Can you do a Fidelity tutorial?

[@xiaobiaoxu5984]

@@unexpectedgoodluck2210 It doesn't matter actually (buy two options together or not). There will be always two separate options ... you buy a leap, then sell a short for the same stock/etf, that is it ....

[@dannysun6186]

I was thinking using loans to own underlying shares to sell covered call against it paying back with amortization instead of doing PMCC by taking the risk of OTM from LEAP.

[@TavinhoGodoy]

Hey man! How to do a PMCC on webull? Thank you

[@frankferreyra6807]

Should you buy back covered call you sold, when you think stock will move higher

[@lucauau]

How am I supposed to manage the long ITM call? When am I supposed to close the position? If the underlying stock price goes up? If it goes down? Would be nice to analyse the different scenarios 😊

[@matthewsherwin8741]

Wow! You did a really nice job with this, Jake! I’m impressed. Reading just a bit between the lines, though, I think you look down your nose a bit at buying shares of stock and you do this quite intentionally. I know you do buy shares of stock in your other accounts so I think you might be gearing these videos to get a lot of views for your KZbin channel. Don’t get me wrong; you’re brilliant but yet I think you cover topics that are carefully chosen to get votes and subscribers.

[@JakeBroe]

Hey Matthew! My whole life I've been a pretty serious math nerd and options to me are just the most interesting thing in the world at the moment. Eventually I'll calm down and just buy ordinary stocks, but right now the returns I believe I can get from leveraging money with options is incredible. I know I assume the risk, but at this point in my life I am fine with that.

[@bunkerman99]

@@JakeBroe I think you assume far less risk than actually owning the stock.

[@sundri21]

What if you have margin 4 X leverage by a certain broker? In this case, is it still good to do the PMCC?

[@justinsane7128]

Which broker has 4x?

[@sureshnagaral5388]

Good

[@tthedon2471]

super fantastic

[@JakeBroe]

Thanks tibor! Cheers!

[@myturninline8633]

Is this only for calls what about if I want to do it on outs or even buying a call leap then selling a long put ?

[@JakeBroe]

Sure, you can do the reverse of this on the put side as well.

[@alainleistikow4800]

Totally noob question, but at 10:01 in your video you mention "Sell-to-Open and then Buy-to-Close; Try to capture 50% of value". How do you determine that?

[@infate-726hl87]

Hey Jake, so when you buy a LEAP, you dont own the stock yet, so could you re-explain how are you able to sell a covered call. Thanks.

[@JakeBroe]

Hey David! That is correct, you don't own the stock. But since you own a call (the LEAP), that has a strike price lower than the call you are selling, your broker knows you can 100% cover the call you sell as long as you hold that leap. It's not a true "covered call", it is a vertical spread. Poor Man's Covered Call is just the nick name for it.

[@behrensf84]

So, in a covered call, can you keep rolling until it is out of the money? with every roll the premiums go up and the value of the stock goes up.

[@JakeBroe]

Yes, you can roll a covered call that looks like it will get assigned to avoid getting assigned. Do you mean just buy to close and then sell to open a new one for more premium faster?

[@behrensf84]

@@JakeBroe yes

[@entine4]

You mention that if you hold a leap for >1 year, you’ll get long-term cap-gain treatment. However, while that’s true if you simply are long a leap, here you have hedged position due to the short calls, and thus it might constitute a tax-straddle. The irs rules are complex but generally, a tax-straddle will NOT be eligible for favorable long_term rates, and to add insult to injury, you can’t even realize any losses on the short legs until you fully unwind the long leg. There is an exception for “qualified covered calls” (QCC) but I don’t know if it applies to PMCC. I’m curious if you or anyone else knows the answer.

[@JakeBroe]

Interesting... the expiration dates for the calls are different and they would be placed at different times more than likely. I'm not even sure how your brokerage would even know they were related. These are some pretty esoteric rules, so I might have made an incorrect assumption. I honestly can't say for sure.

[@PrivateUsername]

Jake - what happens to the LEAP if Apple stock splits? Is your contract now holding 200 shares, or does the value/strike get cut in half?

[@JakeBroe]

Hey PU! All options contracts automatically adjust so neither the buyer or seller of a contract is negatively affected. If you had a LEAP on 100 shares (1 contract) and it split to 400 shares, then you now have 4 contracts.

[@casienwhey]

Here is the problem with the poor man's covered call. When (not if) your call is assigned, you will either have to roll the call and take the loss hoping to recover it on your next short call you sell, or let your long call get called away and lose the time value in the contract, which is not a good choice. If the stock moves up a lot, then you'll be doing a lot of rolling to avoid losing your long call. With a regular covered call, you don't have this issue because the stock does not have time value you need to worry about. So, if I'm gonna write cc's I'm doing it with stock.

[@wolfgangi]

Hey Jake as I was rewatching the video @17:55 you mentioned the worst case scenario, but shouldn't the worst case scenario be that the price of the underlying asset has dropped below the strike of your leap? In that case we lose everything ?

[@JakeBroe]

Yeah, that would be a disaster for sure, haha. But that is the worst case scenario of a LEAP, not really a PMCC.

[@wolfgangi]

@@JakeBroe Ah I got you thanks for clarifying!

[@kaziahmed7897]

Hey Jake, I used to follow you on your stock trading you tube video. I see you occasionally on your Ukraine videos. Just curious if you plan to get back to trading again?