This is probably the number one question I get asked in the Options Goddess community, and I have been getting it over and over again. So let's talk about it. What actually happens at expiration when you're running a poor man's covered call?
If you've been following along with my Market Minutes, you know I love LEAPs. I talked about IBIT LEAPs back in MM5, and I've walked through selling calls against positions in MM13 with ALAB. The poor man's covered call, or PMCC, combines both of those concepts. You own a deep in the money LEAP as your long position, and you sell a shorter term call against it to collect premium. It's one of my favorite strategies because it gives you leveraged exposure without tying up the capital that owning 100 shares would require.
For this example, I'm using Marvell Technology. MRVL has made all time highs and broke out of resistance at the 105 area. On my 4 hour IADSS chart, I'm seeing a sell divergence with a +2 mean reversion spike. That tells me we could pull back and retest the 105 to 110 zone.
Let's say I own the January 2028 $70 call. The delta is 0.88, so this LEAP is deep in the money. The extrinsic value right now is roughly $17. That extrinsic is the portion of the option that is not real value. It's the time and volatility component. So I haven't made all that money quite yet.
Now I sell the May 130 call against it for a $12 credit. My breakeven on that short call is $142. Here's where the question always comes up. What happens at expiration if this short call goes in the money? Most people assume the broker will just use the LEAP to offset the short call. And that is not how it works.
Let me be very clear on this. If you owned 100 shares of stock, yes, your long stock would offset the short call and it would be a wash. But because you own a LEAP, not stock, you are going to be assigned short 100 shares for every call you sold. That is a completely different situation, and you need to understand it before you ever place this trade. This is exactly the kind of thing I cover in Course 202 when I teach selling calls and hedging.
So let's walk through all four scenarios at expiration.
Scenario 1: Stock at $128
Nothing happens. The short call expires worthless because $128 is below the $130 strike. You keep your $12 credit, you keep your LEAP, no harm, no foul. This is the ideal outcome.
Scenario 2: Stock at $142 (Your Breakeven)
This is where I kill the small monster. I am very precise on this. If I sell a call against a LEAP and I bring in a $12 credit and my breakeven is $142, the moment we get to $142, I am buying this back to close. That's it. I take the small loss on the short call and move on. If you watched MM15 on rolling and adjusting, you know I am always thinking about my next move before the trade even needs managing.
Scenario 3: Try a Diagonal Roll
Let's say earnings are May 27th and you want to give this one more shot. You could buy back the May 130 call and sell the May 22nd $140 call. That's a diagonal, meaning you're moving out in time and up in price. I teach this concept in Courses 201 and 202. It gives you one more week and a higher strike. But only one attempt. If it doesn't work after that, you close it.
Scenario 4: Stock at $180 and You Did Nothing
Here is where the real problem lives. If you went to sleep and the stock ran to $180, you are now short 100 shares at $130. To buy back that short stock, you're paying $180. That's a $50 loss per share. You only collected a $12 credit. You are underwater by $38.
I am not comfortable taking a $12 credit and turning it into a $38 loss. That math does not work for me.
In this scenario I have to exercise my LEAP to offset that loss. Why? Because if Marvell turns around and heads back down, I lose $38 on the short shares and I give back all that profit on my LEAP too. I just netted that loss twice. Exercising the LEAP stops the bleeding.
The Extrinsic Value Tradeoff
Now here's the part people forget. When you exercise your LEAP, you forfeit the remaining extrinsic value. But remember, when we originally looked at this trade, the extrinsic was $17. If the stock has run from roughly $130 up to $180, that LEAP has gone much deeper in the money. The extrinsic value will have shrunk to roughly $5 to $7. Some of it gets absorbed in that rally. So you're not forfeiting $17. You're forfeiting $5 to $7 in this scenario. That's the cost of stopping a much bigger loss.
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The Lesson
The PMCC is a powerful strategy, but you have to understand the mechanics before you place the trade. Don't create a problem before you ever set it. Know your breakeven, know when you'll close, and have your plan for every scenario. I structure my trades from day one so I don't have to worry about that.
One more thing. If you're implementing this outside of a retirement account, please consult with a tax professional.