A covered call holds 100 shares and sells a call against them. The Poor Man's Covered Call (PMCC) replaces the 100 shares with one deep in-the-money call that has about a year to expiry, and sells the same short call against it. The long call costs about a third of what the shares cost, which is the reason to use it.
This page backtests one algorithmic version on Eli Lilly (LLY) from to , using daily closing option quotes from LSEG, and compares it with buying and holding 100 shares. Both accounts start with the same cash.
| PMCC | Buy and hold 100 shares |
|---|
Volatility is the annualized standard deviation of daily returns. Sharpe ratio = (annualized return − ) ÷ volatility. Max drawdown is the largest peak-to-trough fall in daily account value. Buy and hold excludes dividends.
Where the PMCC's profit came from
| Source | Profit / loss | Detail |
|---|
Rules
Every trade follows from these rules. One option contract covers 100 shares. The entry day is the first trading day of a week (Monday, or Tuesday when Monday is a holiday), and the expiry day is the last trading day of the same week (Friday, or Thursday when Friday is a holiday), which is the day that week's listed option expires.
- Capital. On both accounts start with , the price of 100 LLY shares at that day's close. Buy and hold spends all of it on 100 shares. The PMCC spends on the long call and keeps the rest in cash, which earns a year, which is the risk-free rate. I chose to start with the same amount of cash for both strategies (PMCC and holding the stock) just so that I would be able to make sure that my cash was never negative. However, this method gives a bad representation of the statistics. Indeed, since is sitting in the bank with only a return, it averages out with the overall return, which could lead people to think that the PMCC is not as performant as holding the shares, when in reality it is.
- Long call (the LEAP). On the start date, buy one call expiring 18 Sep 2026, the listed expiry closest to 12 months away. The strike is the listed strike whose delta at the previous day's close is closest to (the delta that I chose for the LEAP), and never below . It is bought at the closing ask and held to expiry, where it is settled at its in-the-money amount. On the next trading day a replacement is bought by the same rule, expiring 17 Sep 2027.
- Trend signal. On the trading day before each entry day, compare LLY's close with the average of its last closes, that day included. Above the average is an uptrend; at or below is a downtrend.
- Target delta. in an uptrend, in a downtrend. A lower delta is a strike further above the stock price, which leaves more room for the stock to rise. I decided to do so so that I could maximize my exposure to the stock going up when general market sentiment was good; when it is less good, I am choosing delta = to get a better premium.
- Short call. On the entry day, take every listed call that expires on that week's expiry day and has a bid at the close. Sell one contract of the strike whose delta at that close is closest to the target delta. Delta is the value LSEG reports for the contract that day. The sale is filled at the closing bid.
- Expiry day. If LLY closes at or below the strike, the short call expires worthless. If LLY closes above the strike, the account buys 100 shares in the market at the close and delivers them at the strike, so it is never short stock. The cost is (close − strike) × 100.
- Nothing else. No rolling, no early closing, no stop-loss.
- Daily valuation. Cash, plus the long call at its closing bid, minus the open short call at its closing ask: the price to close each position.
Blotter
Every trade booked, rows. SELL is the weekly short call. EXPIRE is a short call that finished out of the money. ASSIGN is a short call that finished in the money, followed by the share purchase and the delivery at the strike. SETTLE is the long call at its own expiry.
| Time | Instrument | Side | Qty | Limit | Fill | Cash Δ | Notes |
|---|
Ledger
One row per week. Cash, long call value and account value are taken at the close of the expiry day, after the short call is resolved. Cash also grows by interest between rows.
| Entry day | Trend | Target Δ | Strike | Delta | Premium | Expiry day | Close | Outcome | Cost | Cash | Long call | Account value |
|---|
Write-up
What the strategy is for
The PMCC is for someone who wants covered-call exposure to a stock without paying for 100 shares. Here the long call cost against for the shares. In exchange, the long call has an expiry date, loses time value, and pays no dividends. It is also a little bit more dangerous: if the LEAP does not end up in the money there will be a big loss. As well, it can be expensive to buy shares directly from the market and deliver them at the strike price; we must do so because we do not want to be short any shares and we do not want to exercise the LEAP early.
What happened
The PMCC account returned and buy and hold returned . LLY rose over the year, and a strategy that sells calls gives up part of a rise like that.
The short calls lost money. They collected in premium over weeks, and the weeks that finished in the money cost , a net of . The table below splits this by the trend signal.
| Signal | Target Δ | Weeks | In the money | Premium | Cost | Net |
|---|
The PMCC account was less volatile than buy and hold ( against ) and had a smaller drawdown. That is mostly because about two thirds of the account sat in cash, not because of the options.
If the account started with only the cost of the long call
The table compares the account on this page with the same rules run in an account that starts with only , the cost of the long call.
| PMCC, same cash as the shares | PMCC, long call cost only | Buy and hold 100 shares |
|---|
With only the cost of the long call, the cash balance falls to . When a short call finishes in the money the cost is paid in cash, while the offsetting gain stays inside the long call. That account would have had to borrow, and no borrowing cost is charged here.
Limitations
One stock, one year, and a year in which the stock rose strongly. The result says little about flat or falling markets, where selling calls usually does better.
Buy and hold excludes LLY's dividends, which were under 1% for the year. The PMCC receives none.
All fills are at daily closing quotes for one contract, with no commissions. The long call rarely trades, so its bid and ask are quotes, not trades.
Short calls are assumed to be assigned only at expiry. Early assignment is possible for American-style options and is ignored.
On an in-the-money expiry day the share purchase is larger than the account's cash. The purchase and the delivery happen at the same close, so only the difference is paid.
A few option quotes could not be retrieved from LSEG in May to July 2026 because of dropped requests. Every week still has at least 22 strikes to choose from.