Buy Leap Sell Covered Call «UPDATED ◎»

The strategy of buying a Long-term Equity Anticipation Security (LEAPS) and simultaneously selling short-term covered calls against it is formally known as a Long Call Diagonal Debit Spread. In trading circles, it is more commonly referred to as the "Poor Man’s Covered Call" (PMCC). This strategy serves as a capital-efficient alternative to the traditional covered call, allowing investors to mimic the returns of owning 100 shares of stock at a fraction of the cost. By substituting expensive equity with a deep-in-the-money (ITM) long-term call option, traders can generate consistent income while maintaining a bullish long-term bias.

The primary advantage of this strategy is leverage. Purchasing 100 shares of a high-priced technology stock like NVIDIA or Microsoft can require tens of thousands of dollars in capital. A LEAPS contract, however, might cost only 20% to 30% of the price of the actual shares while providing nearly identical exposure to upward price movements. This increased capital efficiency significantly boosts the potential return on capital (ROC). If the underlying stock remains stable or rises modestly, the monthly income from selling covered calls can eventually pay for the entire cost of the LEAPS, leaving the investor with a "free" long-term bullish bet. buy leap sell covered call

However, the PMCC is not without unique risks, most notably the "upside gap" risk. In a traditional covered call, if the stock price skyrockets past the short strike, the investor simply sells their shares at a profit. In a PMCC, if the stock price rises too quickly, the short call may become deeply ITM while the LEAPS has not gained enough value to cover the obligation, especially if the spread was set up with a narrow width between the long and short strikes. To mitigate this, traders must ensure that the total debit paid for the spread is less than the distance between the two strike prices. If the stock price exceeds the short strike, the trader may be forced to close the entire position for a loss or a smaller-than-expected profit. The strategy of buying a Long-term Equity Anticipation