The Poor Man’s Covered Call (PMCC), also known as the Synthetic Covered Call, is an options strategy designed to mimic a traditional covered call with significantly less capital. Instead of purchasing 100 shares of stock, which can be expensive, you buy a deep-in-the-money (ITM) LEAP call option (a long-term option) and sell a shorter-term out-of-the-money (OTM) call option against it.
This approach allows traders to leverage capital efficiently while still generating income from selling covered calls. However, this strategy has different risks and mechanics compared to the Wheel Strategy, another popular cash-flow-focused approach.
1. Understanding the Poor Man’s Covered Call (PMCC)
A traditional covered call involves:
- Buying 100 shares of a stock.
- Selling an OTM call option against those shares to generate income.
The Poor Man’s Covered Call achieves a similar payoff but replaces stock ownership with a LEAP call option.
PMCC Setup
- Buy a Deep In-the-Money LEAP Call
- Choose an expiration at least 6–12 months out (often 1–2 years).
- Select a strike price with a delta of 0.80 or higher, meaning the option moves almost 1:1 with the stock.
- This acts as a synthetic stock replacement.
- Sell a Short-Term Out-of-the-Money Call
- Choose a 30 to 45-day OTM call option to sell.
- The goal is to collect premium, similar to a traditional covered call.
- This reduces the cost of holding the LEAP.
2. How PMCC Compares to the Wheel Strategy
The Wheel Strategy is a cash-secured options strategy that involves:
- Selling cash-secured puts to acquire stock at a discount.
- If assigned, selling covered calls on the acquired shares.
- If the stock is called away, repeating the process.
| Factor | PMCC (Synthetic Covered Call) | Wheel Strategy |
|---|---|---|
| Capital Required | Low (LEAP call replaces stock ownership) | High (Must buy 100 shares if assigned) |
| Leverage | Yes (Options-based) | No (Cash-based) |
| Profit Potential | Higher % ROI due to leverage | Lower % ROI but lower risk |
| Downside Risk | Higher (LEAP can expire worthless) | Lower (Owns actual stock) |
| Income Potential | High, due to repeated call selling | Moderate, depends on assignment and put selling |
| Stock Ownership | No direct ownership, only synthetic exposure | Owns stock after put assignment |
| Best Market Conditions | Bullish or neutral (PMCC loses value if stock drops significantly) | Bullish or neutral (Can acquire stocks cheaply in downturns) |
3. Example of a PMCC vs. The Wheel Strategy
Let’s assume we want to trade Apple (AAPL), currently priced at $180 per share.
PMCC Example
- Buy the AAPL $130 LEAP Call expiring in January 2026 – Cost $60 per contract ($6,000 for 100 shares exposure).
- Sell the AAPL $190 Call expiring in 30 days – Premium received $2.50 per contract ($250 per month).
If AAPL stays at $180:
- The short call expires worthless → You keep the $250 premium.
- You sell another short call → Compound income.
If AAPL rises to $195:
- The short call is assigned or rolled.
- The LEAP gains intrinsic value → Synthetic stock benefits.
If AAPL drops to $160:
- The LEAP loses value but still retains some intrinsic worth.
- You can sell lower-strike calls to adjust.
Wheel Strategy Example
- Sell the AAPL $170 Cash-Secured Put expiring in 30 days – Premium received $3 per contract ($300).
- If AAPL stays above $170, the put expires worthless → You keep $300 and repeat.
- If AAPL drops below $170, you are assigned 100 shares at $170, costing $17,000.
- After assignment, sell the AAPL $190 covered call to generate additional income.
Key Difference: The PMCC uses options to replace stock, requiring only $6,000 in capital vs. $17,000 in the Wheel. The Wheel allows stock ownership, which may be preferable if AAPL pays dividends or is a long-term hold.
4. Time, Compounding, and Risk Management
PMCC Compounding Benefits
Selling $250 worth of calls per month on a $6,000 LEAP investment generates an annual return of ~50%, assuming AAPL remains stable.
If you roll the LEAP to a higher strike after appreciation, profits can compound even further.
Less capital is at risk compared to buying 100 shares outright.
Wheel Compounding Benefits
If not assigned shares, rolling puts generates steady monthly premium income.
If assigned, covered calls reduce the cost basis, potentially leading to "free shares" over time.
Higher capital requirements but lower risk than options expiring worthless.
Risk Trade-Offs
| Risk Factor | PMCC | Wheel Strategy |
|---|---|---|
| Stock Drops | LEAP loses value, but no obligation to buy shares | Assigned shares but can sell calls to lower cost basis |
| Stock Stays Flat | Continuous premium collection, slow LEAP decay | Earns premium on puts/calls, no stock movement needed |
| Stock Rises Significantly | LEAP gains value but capped by short calls | Assigned shares appreciate, but capped by short calls |
| Liquidity & Assignments | No early assignment risk on LEAP, but must roll calls | Can be assigned early, requiring more capital |
5. Which Strategy Should You Use?
When to Use the PMCC (Synthetic Covered Call)
- You want high capital efficiency and leverage.
- You prefer higher returns with less capital upfront.
- You are comfortable actively managing options positions.
- You don’t need stock ownership for dividends or long-term holds.
When to Use the Wheel Strategy
- You prefer stock ownership and are willing to accumulate shares.
- You want a lower-risk approach where you can hold through downturns.
- You have enough cash to secure puts and buy 100 shares per contract.
- You like selling puts and covered calls as part of a long-term investing plan.
6. Final Thoughts
The Poor Man’s Covered Call is a fantastic way to generate income with less capital compared to traditional covered calls. However, it requires active management to handle time decay, stock price fluctuations, and assignment risks.
On the other hand, the Wheel Strategy is a more passive and cash-secured approach that works well for investors willing to hold shares and profit from covered calls.
Key Takeaways
- PMCC is better for high ROI and efficient capital usage.
- The Wheel Strategy is better for steady, lower-risk income with stock accumulation.
- Both strategies work well in neutral or bullish markets but have different risk-reward profiles.
Ultimately, the best choice depends on your capital, risk tolerance, and preference for stock ownership.