Poor Man's Covered Call Calculator

What Is a Poor Man's Covered Call?

A Poor Man's Covered Call (PMCC) is a long call diagonal spread where you buy a longer-dated call (often ITM) and sell a shorter-dated OTM call against it. You're creating a similar structure as a traditional covered call—positive exposure to the stock while collecting premium from selling calls—but using far less capital since you own a call option instead of 100 shares. The trade-off is that your "stock substitute" has its own expiration date and time decay.

Key Characteristics

• Max Profit: Occurs if the stock lands right at your short strike when the short call expires. Your short call expires worthless, and your long call retains the maximum value possible with the stock at the short call's strike. The precise maximum profit is technically impossible to calculate because we don't know what IV will be at the time of the short call's expiration. Our calculator uses no IV change for simplicity.
• Max Loss: Limited to the amount you pay to enter the trade. This happens if the stock drops and both calls go to zero.
• Breakeven: Approximately the long strike plus the net debit. The calculator solves for the exact price where your long call's value (with remaining time) equals your net debit.
• Ideal Conditions: Low IV with room to rise. An IV spike helps your longer-dated LEAPS more than it hurts your short call—and if the short call expires OTM, IV doesn't matter anyway.
• Outlook: Moderately bullish

Constructing a PMCC

To build a PMCC, start by buying a deep ITM long call with a long expiration, usually 6 to 12 months out or more. Then, sell an OTM call with a shorter expiration, often 30 to 60 days. Aim for a long call with a delta above 0.75 for more stock-like exposure. The short call strike should be at or above your target price for the stock over the duration of the short call's lifetime.

Two guidelines help you avoid setups that lose money even when you're right on the direction:

• Debit vs. Width Rule: Don't pay more than the width of the strikes. If your long call is at $100 and your short call is at $120, the width is $20. Avoid paying a debit of $20 or more, as this would result in loss potential to the upside (which covered calls don't have).
• The Theta Rule: The position should have positive theta at entry. If your PMCC has negative theta, it's not acting like a covered call—you're losing money as time passes instead of collecting it.

How to Read the P/L Chart

The cyan line (T+0) shows your theoretical P/L today. T+0 means "today plus 0 days"—it's a common convention for showing multiple points in time on payoff diagrams. The curve is smooth because both options still have significant time value.

The white line (T+Short Call DTE) shows your profit or loss at the short call's expiration (T+30 if the short call was set up with 30 DTE). Below the long strike, your risk profile looks like a naked long call. Between the strikes, you profit as the long call gains intrinsic value while the short call decays. Above the short strike, your profits will taper off because your short call delta will hit -100, while your long call delta with more time until expiration might have a +80 or +90 delta, leaving you net short delta.

The space between the lines shows time decay. When the stock appreciates, the T+0 line will be below the Expiration line, indicating positive time decay exposure (you will make more money as time passes). If the stock falls, you'll notice the T+0 might be higher than the Expiration line, indicating negative time decay (you will lose money as time passes).

Using This Calculator

1. Long Strike: The strike where you buy the long-term call. The long strike must be below the short strike.
2. Short Strike: The OTM strike where you sell the short-term call. The short strike must be above the long strike.
3. LC DTE: Days to expiration for the long call. Ideally, 180+ days.
4. SC DTE: Days to expiration for the short call. Typically 30–60 days.
5. LC Price: The price paid for the long call.
6. SC Price: The sale price of the short call.
7. Stock Price: The stock price at trade entry.
8. Quantity: Number of spreads. A quantity of 5 means you're buying 5 calls and shorting 5 calls to build your PMCC.

Managing a PMCC

The advantage of a PMCC is repeatedly selling short-term calls against your long call.

The goldilocks scenario: The stock appreciates to your short call strike, it expires worthless, and you short another higher-strike call 30–60 days out. Rinse and repeat. Your long-term call continues appreciating while the calls you sell expire worthless, leaving you with accumulating profits on both legs.

If the stock moves above your short strike: You can close the whole position for a profit, roll the short call up and out for a credit (if possible), or let the short call get assigned. If assigned, you are short 100 shares, but your long call covers you. You can exercise your long call to deliver shares, or buy 100 shares to cover and then sell the long call. If you are unable to roll the short call up and out for a credit, or it is not a high enough strike to get it OTM, closing the entire trade avoids the complexity.

If the stock drops: You can roll the short call down to a lower strike to collect more credit, but this might suffocate your position if you're rolling down to a short call strike close to or equal to your long call strike. In this scenario, it makes sense to hold off on selling another call (holding the long call on its own), or closing the position to cut losses.

PMCC vs Covered Call

A regular covered call means buying 100 shares and selling OTM calls against the shares. For a $100 stock, you need $10,000. A PMCC might cost only $1,500 to $2,500 for a similar position. If you have less capital, the PMCC lets you participate, but with higher risk. If you want to hold for years, a covered call is simpler since stocks don't expire. If you want to use your capital more efficiently and are comfortable managing the complexities of a diagonal spread, the PMCC gives you exposure similar to a covered call with less capital.

Risks to Consider

The main risk is a significant drop in the stock price. With a covered call, you still own shares that might recover, but a PMCC can lose all its value if the stock falls far enough. Or, if your long call expires OTM at a full loss, only for the stock to rip higher afterwards. This would result in a covered call position recovering, with the PMCC sitting out the rally at a full loss.

Avoid the VIX: Don't use PMCC on the VIX. Each VIX options expiration tracks a different VIX futures contract, which move at different magnitudes. If the VIX is at 20 and moves to 40, the 30-day VIX future will appreciate similarly, while a 180-day VIX future might only reach 30. This means your short call in the near-term expiration would suffer heavy losses, while the long call in the longer-term expiration wouldn't appreciate as much. Stick to equities when trading the PMCC.

A Note on Dividends

Since a PMCC owns a long call option and not shares, a PMCC trader will not receive dividends paid out by the stock over time. Also, if the short call becomes ITM, it will be at higher risk of early assignment if an ex-dividend date is approaching and the dividend exceeds the extrinsic value of the short call.

Related Calculators

• Covered Call Calculator — Traditional version with shares
• Bull Call Spread Calculator — Same-expiration alternative
• Long Call Calculator — The long leg explained