The covered call is one of the most popular income strategies in options trading. It's also one that a lot of traders never actually use — not because the strategy doesn't work, but because the capital requirement stops them before they start.
100 shares of NVIDIA at $174 is $17,400. 100 shares of Apple is $25,000. For a lot of retail traders, that's most of their account tied up in a single position. A synthetic covered call solves that problem — same income, fraction of the capital. Here's exactly how it works and when it actually makes sense to use it.
The Traditional Covered Call Problem
A standard covered call requires you to own 100 shares of stock before you can sell a call against it. The shares are your "cover" — if the call gets exercised and your shares get called away, you can deliver them without going short.
The capital requirement is the friction point. On expensive stocks, owning 100 shares means locking up $10,000 to $25,000 or more in a single position. For traders with smaller accounts, that capital concentration creates real risk — too much of your portfolio in one stock means a single bad earnings report can significantly damage your account before you ever collect meaningful premium.
The strategy itself isn't the problem. The entry cost is.
What "Synthetic" Actually Means Here
A synthetic covered call replaces the 100 shares with a deep in-the-money long call option — typically a LEAPS with 12 to 24 months to expiration and a delta of 0.80 or higher. That long call behaves similarly to owning 100 shares because its high delta means it moves roughly $0.80 for every $1 the stock moves.
Against that long call, you sell a short-dated call above the current stock price — exactly like a traditional covered call. The short call collects premium. The long LEAPS call provides your cover if the short call gets exercised.
The result: you have essentially the same position as a covered call — same premium income, same upside cap, same directional exposure — but instead of $17,400 in NVIDIA shares you might have $3,000 to $4,000 in a LEAPS call. The capital efficiency is significant.
This structure is also called a Poor Man's Covered Call (PMCC) or a diagonal spread. Different names for the same mechanics.
The Payoff Is Identical — Mostly
Let's compare the two structures on the same stock so the numbers are clear.
Traditional covered call: You buy 100 shares of XYZ at $150. You sell the $160 strike call expiring in 35 days for $2.50. Your maximum gain is $12.50 per share ($10 gain on shares from $150 to $160, plus $2.50 premium). Your breakeven is $147.50. Capital required: $15,000.
Synthetic covered call: You buy the $125 strike LEAPS call expiring in 18 months for $30.00 (delta 0.85). You sell the same $160 strike call expiring in 35 days for $2.50. Your maximum gain if the short call gets exercised: roughly $12.50 per share (the intrinsic value move in your LEAPS from $125 to $160, minus what you paid for the LEAPS, plus premium collected). Capital required: $3,000.
The premium collected on the short leg is identical — $2.50 in both cases. The upside cap is the same. The difference is you deployed $3,000 instead of $15,000 to get there.
The one meaningful difference: dividends. When you own shares, you receive dividends. When you own a LEAPS call, you don't. On dividend-paying stocks this matters — especially if an upcoming ex-dividend date is within your LEAPS expiration, since it can also trigger early assignment on your short call. Always check the dividend calendar before running a synthetic covered call on a dividend payer.
When It Actually Makes Sense to Use This
Three situations where the synthetic structure genuinely makes sense over owning shares:
High-priced stocks with small accounts. If NVIDIA, Apple, or Google are on your watchlist but 100 shares would represent more than 20-25% of your account, a LEAPS-based synthetic lets you participate in the covered call income without the concentration risk. You're getting the same strategy at a fraction of the capital.
When you want directional exposure without locking up cash. A LEAPS call gives you upside participation in a stock you're bullish on long-term, while the short calls you sell against it reduce your net cost basis over time. If the stock runs significantly above your LEAPS strike you profit on the long leg. If it grinds sideways you collect premium. You're expressing a bullish long-term view without tying up full share capital.
Capital efficiency across multiple positions. Instead of running one covered call on an expensive stock, a synthetic lets you run two or three positions across different tickers with the same capital. Diversification across multiple covered call setups reduces the impact of any single position going wrong.
The Real Risks People Gloss Over
Every options tutorial mentions the mechanics of synthetics. Most skip the parts that actually hurt you.
Theta drag on the long leg. Your LEAPS call loses time value every day — just more slowly than a short-dated option because of its long expiration. If you hold a LEAPS for 18 months and the stock goes nowhere, you'll experience meaningful time decay on the long leg even while you're collecting premium on short calls against it. The premium you collect needs to outpace the theta decay on the LEAPS over time or the structure is losing ground.
Early assignment on the short leg. If your short call gets exercised early — most likely ahead of a dividend or when the call has almost no extrinsic value left — you're obligated to deliver 100 shares you don't own. You'd need to exercise your LEAPS (losing remaining time value) or buy shares at market to cover. This is manageable if you're watching your positions, but it's an unpleasant surprise if you're not.
Bid-ask spreads on illiquid tickers. LEAPS on lower-volume stocks can have wide bid-ask spreads — sometimes $1.00 to $2.00 wide or more. That spread comes directly out of your return. On a $3,000 LEAPS position, a $1.50 wide spread means you're starting the trade already down 5%. Stick to liquid names with tight spreads on both legs, or the capital efficiency advantage disappears quickly.
How to Find the Right Contracts
The structure itself is straightforward once you understand it. The harder part is finding tickers where the short call premium is actually worth the trade — elevated IV, reasonable probability of expiring worthless, no earnings before expiration, tight spreads.
I use StrikeScan to screen for short call candidates — it filters 60,000+ live contracts by probability, IV rank, and earnings proximity across 5,000+ tickers every 15 minutes. Whether you're running a traditional covered call or a synthetic, you're looking for the same quality short call. The scanner finds them without you manually hunting through chains ticker by ticker.
Quick Recap
A synthetic covered call replaces 100 shares with a deep ITM LEAPS call, giving you the same premium income and upside cap at a fraction of the capital. It makes the most sense on expensive stocks, smaller accounts, or when you want exposure across multiple positions without overconcentrating. Watch for theta drag on the long leg, early assignment risk ahead of dividends, and wide spreads on illiquid names.
The mechanics are simple. The discipline to pick the right underlying and manage the position over time is where most traders either succeed or give up on the strategy entirely.
Disclosure: I am the founder of StrikeScan, the platform referenced in this article. This is not financial advice.