What a Poor Man’s Covered Call Actually Costs You
PMCCs get pitched as “cheap leverage on a covered call.” That’s true, but incomplete — here’s the full cost structure nobody mentions when they’re selling you on the idea.
The pitch, and what it leaves out
A Poor Man’s Covered Call (PMCC) — sometimes called a diagonal — replaces the 100 shares in a traditional covered call with a deep in-the-money LEAPS call, then sells a shorter-dated call against it. The pitch is simple: same income strategy, a fraction of the capital. Instead of tying up $65,000 to own 100 shares of a $650 stock, you might spend $18,000 on a deep ITM LEAPS call and get similar directional exposure.
That part is true. What usually gets left out is that you haven’t eliminated the risks of a covered call — you’ve traded them for a different set, and some of the new ones are less forgiving than the ones you gave up.
Cost #1: Extrinsic value decay on the long leg
A real covered call’s long side — the 100 shares — has zero time decay. Shares don’t expire. Your LEAPS call does. Even a deep ITM LEAPS call carries some extrinsic (time) value, and that value bleeds away every day you hold it, working against you exactly the way it works for you on the short call you sold.
Your position is only profitable on net theta if the short call’s daily decay outpaces the long LEAPS’ daily decay. Early in a LEAPS’ life (12+ months out) this is usually true. As the LEAPS gets closer to its own expiration, its decay accelerates and can start outrunning what you’re collecting on the short leg — quietly turning a “income” position into a net decay position if you don’t roll the long leg forward in time.
Cost #2: You don’t actually own the stock
This sounds obvious, but the practical consequences aren’t always obvious. A real covered call gives you shareholder rights: dividends, voting rights, and — critically — the position can never be called away entirely out of your control in the way an option can expire worthless. With a PMCC, if your short call gets deep ITM and gets assigned, you don’t have shares sitting there to deliver — you have to exercise your own long LEAPS to cover it, or close both legs, and either path can trigger a cash crunch or a tax event you didn’t plan for.
No dividends
If the underlying pays a dividend, a real covered call holder collects it. A LEAPS call holder does not — you own an option, not the stock. On a high-dividend name, this is a real, ongoing cost that a lot of PMCC comparisons simply ignore in their “look how much cheaper this is” math.
Cost #3: Delta isn’t static the way it looks on paper
A deep ITM LEAPS call might show a 0.80 delta today, which looks like “80 shares of exposure” — close enough to 100 shares that people treat it as roughly equivalent. But delta moves. If the underlying drops, your LEAPS delta drops too — often faster than you’d expect deep ITM — meaning your “covered call” position quietly becomes less covered exactly when the stock is falling and you’d most want the protection.
| Scenario | Real Covered Call | PMCC (Diagonal) |
|---|---|---|
| Capital required | Full share value | Fraction (LEAPS premium) |
| Time decay on long side | None (shares don’t expire) | Real, accelerates near LEAPS expiration |
| Dividends | Collected | Not collected |
| Delta stability | Fixed at 100 (or -100) | Moves with the underlying and time |
| Assignment handling | Deliver shares you own | Must exercise/close LEAPS to cover |
So is it worth it?
Yes, often — the capital efficiency is real and meaningful, especially on higher-priced names where tying up full share capital isn’t practical. But it’s a genuinely different risk profile, not a strictly-better version of the same trade. Running a PMCC without accounting for extrinsic decay on the long leg, delta drift, and the lack of dividend income is how a position that looked cheap on day one quietly becomes expensive by month six.
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Educational content only. Nothing in this article is investment advice or a recommendation to buy or sell any security. Options trading involves substantial risk and is not suitable for every investor. Past performance of any strategy discussed does not guarantee future results.