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Diagonal spread vs poor man's covered call: is there a difference?

A poor man's covered call is a diagonal spread. It is the version with a deep in-the-money long call and a short call sold against it every month, built to stand in for 100 shares.

Comparison · 8-minute read · Updated 2026-10-29

The short answer

There is no real difference, and that is the answer most pages dance around.

A diagonal spread is any two-leg options trade where the strikes differ and the expiries differ. That is the whole definition. Calls or puts, bullish or bearish, wide or narrow.

A Poor man's covered call is one specific diagonal: buy a long-dated call deep in the money, sell a shorter-dated call above the stock, and keep selling that short call month after month. The job is to imitate a Covered call without paying for 100 shares.

So the comparison isn't diagonal versus PMCC. It's the family versus one member of it. What changes between them is which strikes you pick, how far apart the expiries sit, and whether you plan to repeat the short leg or close the whole thing as one trade.

Side by side

What makes a diagonal a PMCC

Three choices, all in the long leg.

It's deep in the money. A high-delta call moves close to dollar-for-dollar with the stock, which is the only way it can act like shares. An out-of-the-money long call is still a diagonal, but it is a lottery ticket with a call sold against it.

It has lots of time. You want the long leg to outlive many short legs. A long call with 11 months left can carry eleven monthly cycles. One with six weeks left carries one, and then you are out.

The strikes are far enough apart. This is the part people skip. The gap between your two strikes, times 100, has to be bigger than what you paid net. Otherwise a strong rally — the thing you're hoping for — turns into a loss.

A plain bullish diagonal ignores all three on purpose. Buy a 90-day $55 call for $3.00 and sell a 30-day $60 call for $1.00, and you have a $200 directional bet on a stock that currently sits at $50. Also a diagonal. Also fine. Just not a substitute for owning anything.

A worked example (hypothetical)

Cobalt Mining, a made-up stock, trades at $50. This is an illustration, not a trade idea.

• Buy the 12-month $40 call for $13.00 → $1,300 out.
• Sell the 30-day $55 call for $1.00 → $100 in.
• Net debit: $1,200.

Check the rule before anything else. The strikes are $15 apart, so $1,500. You paid $1,200. $1,500 beats $1,200, so a rally can't hurt you. Had that long call cost $17.00, the net debit would have been $1,600 against a $1,500 width, and the best outcome in the trade would have been a $100 loss.

Here is the short leg at the end of its 30 days:

In those last two rows the long call gained more than the short leg lost, which is exactly what it is there for. But the gain stops growing. If you let the assignment happen and exercise the long call, you buy at $40 and deliver at $55: $1,500 in against $1,200 out, so +$300 — whether Cobalt finished at $58 or at $180.

Selling the long call instead of exercising it usually beats that, because you keep whatever time value is left in it. Exercising is the floor, not the plan.

Now the other end. A year later Cobalt sits at $35. The $40 call expires worthless. The $1,300 is gone and the $100 of call premium is all you have: −$1,200. Someone who bought 100 shares at $50 is down $1,500 — a bigger number — but they still own 100 shares, they can keep selling calls, and they have no deadline. You have nothing.

That is the trade you make with every diagonal. Less money down, a date it has to work by.

In Canada, a short call in a TFSA or RRSP generally has to be covered by shares rather than by another option, so both of these are usually non-registered trades — and any diagonal needs spread-level options permission, which differs by broker.

Which fits you?

1. "I want covered-call cycles but $5,000 a stock is too much." The PMCC. Deep long call, long dated, strike width wider than your debit.
2. "I think this moves up over the next couple of months and I want it cheap." A plain bullish diagonal. One trade, closed as a unit, and expect it to expire worthless sometimes.
3. "I want the premium and I want to keep the shares." Neither. Buy the shares and run the wheel strategy — the wheel against a PMCC wheel puts the capital side by side.
4. "I want shares eventually, not an option." Then compare the long call directly with buying stock in LEAPS vs buying shares.

The options strategy payoff calculator will draw either version before you place it, and the map of strategies past the wheel shows which family each one belongs to.

Questions