Within the Indian derivatives landscape, options strategies have become an integral part of a sophisticated investor’s toolkit. They offer flexibility, leverage, and a cost-effective means of participating in market movements. Among these, the poor man’s covered call has gained attention as an innovative alternative to the traditional covered call strategy.
This approach provides the benefits of a standard covered call—such as consistent income through premium collection—while requiring far less capital. Rather than purchasing 100 shares of a stock, the investor acquires a deep in-the-money (ITM) call option that closely mirrors the movement of the underlying asset. This long ITM call acts as a substitute for stock ownership, creating a capital-efficient way to manage exposure and generate income simultaneously.
However, implementing the poor man’s covered call strategy effectively requires an in-depth understanding of options pricing, time decay, and margin dynamics within the framework of Indian exchanges such as the National Stock Exchange (NSE).
The poor man’s covered call—sometimes abbreviated as PMCC—is a modern adaptation of the conventional covered call. In a traditional setup, an investor owns the underlying shares and sells a near-term out-of-the-money (OTM) call option against them. The sale of this short call provides income in the form of a premium, but it also caps the upside potential beyond the strike price of the sold call.
In contrast, the poor man covered call replaces the stock ownership with a deep ITM long call option, typically one with a longer expiry such as six months to one year. The investor then writes a short-term OTM call option—usually with a one-month expiry—against this long call position.
The long ITM call behaves much like the underlying stock, while the short call generates recurring income. This structure enables traders to mimic the payoff profile of a covered call using significantly less capital, making it especially attractive to investors who prefer leveraged yet controlled exposure.
A call option is considered deep in-the-money when its strike price is substantially lower than the current market price of the underlying stock. Deep ITM calls typically have a high delta—often between 0.8 and 1.0—indicating that their price moves almost in tandem with the underlying share.
For instance, if Reliance Industries Limited trades at ₹2,400, a ₹2,000 strike call would be categorised as deep ITM. Most of the option’s premium in this case represents intrinsic value rather than time value. Hence, deep ITM calls function as a cost-effective alternative to direct stock ownership while requiring considerably less capital.
| Stock | Current Price | Deep ITM Call Strike | Intrinsic Value | Delta |
| Reliance Industries | ₹2,400 | ₹2,000 | ₹400 | 0.9 |
This high delta ensures that the option’s movement replicates that of the stock to a great extent, providing a near-equivalent exposure with limited capital deployment.
The structure of the poor man’s covered call strategy comprises two legs:
The long ITM call serves as a stock replacement, while the short OTM call generates regular premium income. As the short call approaches expiry, the investor may roll it over to the next month’s expiry, thus maintaining the income stream over time.
Objective:
To generate consistent income through call premiums while participating in the potential long-term appreciation of the underlying stock, all while committing significantly less capital compared to direct stock purchase.
| Parameter | Owning Stock | Deep ITM Call |
| Capital Requirement | High (full share price) | Lower (option premium only) |
| Dividend Eligibility | Yes | No |
| Delta | 1.0 | 0.8–0.95 |
| Impact of Time Decay | None | Moderate (theta decay) |
| Liquidity | High (especially for large-cap stocks) | Variable depending on strike |
| Risk Exposure | Stock may fall to zero | Limited to premium paid |
| Leverage | None | High (due to smaller capital outlay) |
While the deep ITM call mimics the stock’s movement effectively, it does not confer shareholder rights or dividend entitlement. Nonetheless, its capital efficiency makes it an attractive tool for traders seeking to optimise margin utilisation and improve portfolio yield.
This blend of leverage, flexibility, and income potential makes the poor man’s covered call particularly appealing to active derivatives traders.
While efficient, this strategy is not devoid of risks:
Hence, this strategy demands ongoing monitoring and disciplined adjustment.
Before adopting a poor man’s covered call strategy, investors should assess several practical elements:
Traditional covered call:
Buy 100 shares of the stock + Sell one OTM call.
Poor man’s covered call:
Buy one deep ITM long-term call + Sell one short-term OTM call.
The payoff structure mirrors that of the traditional version but at a fraction of the cost.
Let us assume an investor expects Reliance Industries’ stock to stay steady or move slightly upward.
Net cost per share equivalent: ₹450 – ₹40 = ₹410.
In comparison, buying 100 shares outright would cost ₹2,400 each. If the stock remains below ₹2,500 by expiry, the short call expires worthless, allowing the investor to retain the ₹40 premium. The investor can then repeat this sale in the next month to continue generating income.
If the stock rises above ₹2,500, profits are capped beyond that point—similar to a traditional covered call.
Each of these strategies carries distinct risk-reward characteristics and regulatory implications, making it vital for traders to choose based on their objectives and market outlook.
Avoiding these errors helps preserve consistency in returns and minimises operational hurdles.
The poor man’s covered call is best suited for experienced investors or traders familiar with derivatives and option mechanics. It caters to those with a moderate risk tolerance who aim to achieve capital efficiency without compromising directional exposure.
It may not appeal to conservative investors seeking dividend income or those uncomfortable with managing rolling positions. Additionally, compliance with SEBI’s risk management standards and brokerage-level option authorisations is essential.
The poor man’s covered call strategy stands out as a prudent evolution of the traditional covered call. By combining a deep ITM long call with a short-term OTM call, investors can emulate stock ownership while deploying significantly less capital. The result is a balanced approach that integrates income generation, leverage, and capital preservation.
However, as with all derivatives-based strategies, the key to success lies in disciplined execution, continuous monitoring, and effective risk management. Investors must approach this method not as a quick-profit mechanism but as a structured, capital-efficient strategy within a diversified portfolio.
When executed judiciously and aligned with proper understanding of the market environment, the poor man covered call can be an effective means of generating steady income while maintaining exposure to quality stocks in India’s dynamic options market.
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