Poor man’s covered call (long-call diagonal)

Definition

A PMCC replaces the covered call’s 100 shares with a deep in-the-money long-dated call (often a LEAPS), then sells shorter- dated calls against it: a long-call diagonal (strategy-diagonal-spread) built to mimic covered-call economics at a fraction of the capital. The colloquial name is standard practitioner vocabulary; structurally it is a diagonal, and its risks are diagonal risks, not stock risks.

How it works / structure

• Legs: +1 deep-ITM call, far expiry (delta typically ≥ 0.80); −1 OTM call, near expiry, struck above the long call’s strike.
• Capital: the long call’s debit (a fraction of 100 shares’ cost) — the leverage is the point and the risk.
• Parameters (engine-executable): long-leg delta floor and minimum DTE (e.g. ≥ 0.80 delta, ≥ 12 months), short-leg delta/DTE (e.g. 0.25-0.35, 30-45 days), roll cadence for the short leg (mgmt-rolling), width rule (short strike above long strike + net debit — otherwise a max-profit zone inversion), exit/re-establish rule for the long leg as its DTE decays.
• Differences from stock: no dividends received (and dividend dates RAISE the short leg’s assignment risk — ms-expiration-exercise-assignment); the long leg carries theta (greek-theta) and rho (greek-rho); a deep crash can take the long call’s delta well below 0.80, degrading the hedge ratio exactly when the short premium stops helping.

When it applies

Covered-call-style income theses where capital efficiency matters, on liquid underlyings with tight long-dated markets. The structure’s economics require the long leg to be genuinely deep ITM and long-dated — degraded versions (0.60-delta, 6-month backs) are directional diagonals wearing the wrong name.

Risk profile & failure modes

• The long leg can expire worthless: unlike shares, the “stock substitute” has a terminal date and a total-loss outcome; a deep bear market can erase the entire debit.
• Extrinsic bleed on the back leg: the long call’s time value decays throughout — income accounting that ignores it flatters every cycle (the classic PMCC bookkeeping error, labeled folklore when presented as pure income).
• Upside gap through both strikes: max profit is capped and arrives with the awkward mechanics of a deep-ITM short leg (early assignment, exercise-to-cover decisions).
• Liquidity of LEAPS: long-dated chains trade wide; entry/exit friction on the back leg is a real cost (ms-bid-ask-spread).

Evidence & limits

Mechanics are contract arithmetic (OCC/Cboe). No public study evaluates PMCC as a class; component evidence is the covered-call literature (strategy-covered-call) minus dividends plus financing/decay costs — whether the capital saved outruns the extrinsic bled is a per-underlying replay question, never an assumption.

Falsifiable-thesis examples

Illustrations only, not signals:

• “A PMCC on X (0.85-delta 14-month back, 0.30-delta monthly fronts) will collect front premium exceeding the back leg’s extrinsic decay over the next two quarters in replay” — falsified by the two summed amounts.
• “X will stay below the short strike across the next three monthly cycles (no assignment events)” — falsified by any cycle finishing above it.

Cross-references

• Structural parent: strategy-diagonal-spread; economic template: strategy-covered-call
• Exposures: greek-delta, greek-theta, greek-rho
• Mechanics: ms-expiration-exercise-assignment, event-dividends-ex-dates, ms-bid-ask-spread
• Management: mgmt-rolling, mgmt-assignment-handling