Poor Man's Covered Call
This page assumes the covered call and LEAPS pages have been read: the structure is one of each. The general mechanics of two expiries (why the short leg must expire first, how a broker margins the pair, what a roll does) live on the diagonal spread page, of which this is the long-dated, deep-in-the-money case. Tesco is used as a model underlying; this is not a view on Tesco.
Construction: a June 2027 LEAP and a September call
Two inequalities decide whether the pair behaves like a covered call rather than a speculative spread. First, the short strike sits above the LEAP strike plus the LEAP's cost: 470p against 462.00p, 8.00p of room. If the short call is assigned and the LEAP is exercised to deliver, the shares are bought at 380p and sold at 470p, and the 90p difference repays the 82.00p LEAP with the 5.00p credit on top (95.00p in against 82.00p paid, 13.00p to spare before costs). Second, the LEAP is deep enough to move like shares: 859 share-equivalents per contract, against 1,000 for the shares themselves. The LEAP's time value, 12.00p (14.6% of its price), is the rent paid for that stand-in over 305 days.
The American value matters for this LEAP. Two dividends fall inside its life (an assumed 5.08p interim going ex on 15 October 2026 and an assumed 9.70p final going ex on 13 May 2027), and a holder of a deep in-the-money American call can exercise the day before an ex-date to collect one. The model puts that right at 5.56p a share, the gap between the 81.89p American value and the 76.33p European value (American against European value).
Which Tesco contract can carry it: standard, mini or US
An ICE standard Tesco option (code TCO) covers 1,000 shares, so a covered call written the ordinary way needs £4,522.50 of Tesco, including £22.50 of stamp duty reserve tax. ICE has also listed a 100-share Tesco mini option (8TC) since 8 December 2025, one of 22 UK names with a mini. Mini expiries run to the front three months plus the next three quarters, so on 17 August 2026 the longest mini is June 2027, 305 days away: a mini version of this position exists, with a long leg of about ten months, not a year or more. Standard series list serial months to one year, or two years on ICE's Target Group names; we could not confirm which group Tesco is in (checked 26 September 2026), so a Tesco standard LEAP more than a year out may not be on screen. Both contracts are listed on ICE; a reader would check that the broker offers them and quotes a two-way price (contract sizes).
The mini removes the capital barrier (a covered call on 100 Tesco shares needs £452.25) and with it much of the case for the poor man's version. What it does not remove is the fixed cost per contract: at the placeholder £1.70 commission, opening one mini position costs 68% of its first £5.00 credit, against 5.6% on the standard contract. The US line is counted in pounds at an illustrative $1.356 per £1 on 17 August 2026; a UK taxpayer converts each leg on its own date (two dates, two rates), and the account paperwork is on the US options page.
Payoff on 18 September and at the LEAP's expiry
The solid line is why a two-expiry position has no textbook payoff diagram. On 18 September the short call is worth only its intrinsic value, but the LEAP still has 273 days to run and keeps its time value, so below the 470p strike the line curves instead of running straight, and above it the line flattens instead of rising. It crosses zero at 446.8p (447.1p after the opening commission), peaks at the 470p short strike at £206.10, and then drifts down only slowly, because above 470p the short call loses a full penny for each penny of rise while the LEAP gains about nine-tenths of one. The purple line shows the position left to the LEAP's own expiry with the September call lapsed and nothing else sold: flat at the full debit below 380p. That line is where the maximum loss lives; each later call sold lifts it by the credit kept.
Two columns tell the capital story. At 420p the poor man's version is −£217.80 against −£250.00 for the covered call on shares, a similar loss on a sixth of the money. At 530p it is +£177.90 against +£250.00: the shares keep every penny up to 470p, while the LEAP loses some of its time value on the way. The model probability that Tesco finishes above the 446.8p breakeven on 18 September is 55.1%, and above the 470p peak 25.8% (risk-neutral, lognormal, IV 22%). The one-standard-deviation range to 18 September is 421.6p to 480.3p.
Open this example in the strategy builder (the builder values European options, so it reads the 82.00p LEAP fill as a higher implied volatility rather than as early-exercise value).
Choosing the LEAP strike
The LEAP strike sets three things at once: how much the stand-in costs, how closely it tracks the shares, and how high the short strike must be for the inequality above to hold. Priced on the same chain on 17 August:
Deeper strikes buy share-likeness with capital. The 340 call costs £1,160.00 and behaves like 952 shares, with only 5.2% of its price in time value, so little decays; it also lets the short call sit as low as 456.00p. The 420 call costs £537.50, but 44.2% of that is time value, its delta is 706, and its break-even floor of 473.75p is above the 470p short strike this example sells, so an assignment delivered through the LEAP would lose money. The 380 strike used here sits between: 14.6% time value and a floor of 462.00p. The 400 call (788 delta, 25.4% time value, floor 467.00p) would work with a 470p short strike only just.
Value on 18 September across LEAP volatility
On the first expiry the short call has no volatility left in it; everything that is not the share price is the LEAP's implied volatility. The grid prices the position on 18 September at seven prices and three LEAP volatilities: the 22% it was bought at, and six points either side.
At an unchanged 450p the result runs from −£11.20 to +£81.30 depending only on the LEAP's volatility, a spread of £92.50. At 500p the spread narrows to £45.00, because a LEAP further in the money has less time value for volatility to act on. At 470p the range is +£178.80 to +£250.00. So the structure that looks like a covered call on the price axis is also a long-volatility position: a fall in implied volatility after entry can erase a month's credit with the share unchanged (term structure explains why the long-dated IV moves less than the short-dated one, which this grid does not assume).
Greeks of a stock substitute
Delta starts at 580 share-equivalents and moves the wrong way for a share substitute: an instant rise to 480.3p cuts it to 261, as the short call's delta climbs towards the LEAP's, while a fall to 421.6p lifts it to 710. That is the negative gamma of the short call (−88.3 share-equivalents per 10p at entry). Theta is positive while the short call is near the money and turns slightly negative after a fall, when the LEAP's own decay outweighs a short call that has little left to lose. Vega is positive throughout and more than doubles after a fall, which is why the same −1 SD move costs −£189.00 at 22% but −£129.90 if implied volatility rises to 28% with it (position Greeks).
18 September: the short call finishes in the money
Tesco actually closed at 476.2p on Friday 18 September 2026 (price data: Yahoo Finance), 6.2p above the short strike. That makes the model's first cycle a real test of the structure. The LEAP, repriced at 476.2p with 273 days left, is worth 103.30p: a gain of £213.00 on the 82.00p paid. The shares themselves gained £262.00 over the same month; the LEAP captured 81% of that, the rest lost to its delta below 1,000 and a month of time value. It still holds 7.10p of time value (£71.00) and now behaves like 924 shares.
The short call is 6.2p in the money and will be exercised against the writer after the close unless it is bought back. There are four ways out, compared below by the cash that moves plus the model value of anything still held (the LEAP at 103.30p).
The lesson is what the LEAP is and is not. As a store of value it did its job: it kept pace with most of the share's rise, and route 4 turns the month into £194.40 after all four commissions. As a way of delivering shares it is expensive: exercising it throws away time value and pays SDRT that an intermediary would not, so route 3 comes out £90.90 behind route 1. And a writer without shares who is assigned carries the weekend: Tesco closed Monday higher, and route 2 ended £96.68 behind buying the call back for 6.25p on Friday. Route 1 is the one the worked plan takes. On the tax return it is one computation for the grant, −£15.30, dated in 2026/27 (the buy-back is folded into the grant by s148); the LEAP's gain is not taxed until the LEAP is sold. Rolling the short call up and out in one order is the same pair of trades; the rolling page covers the mechanics.
The October call sold the same afternoon shows the new floor at work. With Tesco at 476.2p the plan writes the October 490 call, 28 days, for 6.25p (£62.50); its American value of 6.24p includes 1.29p for the chance of exercise before the 15 October ex-date, and its delta is 343 shares; on the European value, which the strike rule below reads, it is 285 shares, a delta of 0.29. The 480 call would have paid 10.09p, closer to the money (European delta 0.41) and with less room above the 462.00p floor.
The 15 October ex-date and a call assigned without shares
Suppose, as a branch from the path above, Tesco had risen to 500p by Wednesday 14 October, the evening before the assumed ex-date, with the October 490 call two days from expiry. Held through the ex-date, the call is worth 6.32p (its European value with the 5.08p dividend taken out of the share price); exercised that evening it is worth its 10p of intrinsic value, which on Thursday is 4.92p of share value above the strike plus the 5.08p dividend. A holder gains £36.80 a contract by exercising. A private holder pays 0.5% SDRT on the 490p strike, £24.50, and still gains £12.30; an options intermediary with SDRT relief keeps the full £36.80. Either way, assignment on Wednesday evening is the expected outcome (early exercise before an ex-date).
The poor man's covered call writer owns no shares, so assignment leaves the account short 1,000 Tesco from Wednesday, and short over the ex-date it owes the lender an amount equal to the dividend, £50.80. Buying the shares on Thursday at 494.92p (500p less the dividend, other things equal) costs £4,949.20 plus £24.75 SDRT. The share result is −£12.85, and with the dividend owed the route costs −£63.65. Buying the call back on Wednesday afternoon at 10.25p (model 10.15p) would have closed the grant at −£42.80 instead. Exercising the LEAP the same evening, so that shares are there to meet an assignment and receive the dividend, is a third choice; it pays 0.5% SDRT on the 380p strike and gives up the LEAP's remaining time value (assigned without the shares).
The tax of the assigned route follows two rules. The written call merges with the share sale it produced (TCGA 1992 s144(2)): 1,000 shares disposed of at 490p with the 6.25p premium added, £4,962.50 of proceeds, dated on the day of assignment. The shares bought on Thursday are acquired within 30 days after that disposal, so they are matched with it (s106A), and their cost, £4,949.20 plus the £24.75 SDRT, is the cost in the computation: an allowable loss equal to the share result above after the £1.40 assignment commission, in 2026/27. The £50.80 owed to the lender is a cost of the route but not part of that computation, and this page does not model its tax treatment.
Nine months of calls: the ledger
After 18 September the path is assumed, not forecast: a Tesco price for each expiry, chosen to include both a rally and a dip. Each month the worked plan writes the lowest strike on a 10p grid whose European model delta (the Black-Scholes delta, with any dividend taken out of the share price) is 0.30 or less and which is at or above the 462.00p floor. An ex-date close ahead adds early-exercise value to an American call's delta, as on the October call, so the rule reads the European figure to keep the choice consistent from month to month. The plan buys a call back at expiry if it is in the money and lets it lapse otherwise. On Wednesday 12 May 2027, the day before the assumed final ex-date, it closes everything.
The nine calls brought in £427.50 of premium and cost £82.50 to buy back; 7 lapsed and 2 were bought back. Over the whole campaign the position made £366.80 on the £772.80 committed, before the bid-ask costs below and tax. The same calls written against 1,000 shares bought at 450p would have made £517.90 (with the 5.08p interim received on the shares), and the shares alone £188.30. The poor man's version gave up £188.30 of share return for a LEAP result of £37.20: the LEAP paid 12p of time value up front and received no dividend. Against that, the £3,749.70 it left free would have earned about £103.25 at Bank Rate over the 268 days, before tax.
Why the plan closes on 12 May: the LEAP is worth 86.04p as an American call that can be exercised for the 9.70p dividend, but only 77.78p to a holder who keeps it through the ex-date without exercising, a drop of £82.60. Selling it close to intrinsic value the day before hands that choice to a buyer who can exercise without paying SDRT. Replacing the LEAP with a new one instead (rolling it) would carry the structure into another year; the LEAPS page covers when that rent is worth paying.
Each convention above trades one cost for another. A lower short strike would have paid more in the rally months (the December and January calls) and been bought back more often. Buying back only when the call is in the money at expiry leaves the writer exposed to early assignment around ex-dates, which is why the October call carried an early-exercise premium. The close-or-roll page sets these trade-offs out once for every structure.
Costs in pounds
Commission is £1.40 a contract a trade (IBKR UK tiered, checked 26 September 2026; cost conventions): £2.80 to open, £1.40 for each call written, and £1.40 more for each one bought back; nothing on a lapse. The ledger above includes all of it. The bid-ask spread is extra: at half the quoted spread per leg each way, an illustrative 2.5p-wide LEAP quote costs 1.25p a share each way, £25.00 for the round trip, and a 0.5p-wide monthly call 0.25p each way, £5.00 if it is written and bought back. One month of writing and buying back costs £7.80 with commission. Over the ledger's nine months, commissions and half-spreads together come to £70.70, 17% of the premium taken in. There is no SDRT on writing or trading the options; the 0.5% arises only when shares are delivered, as in routes 2 and 3 above (who pays SDRT).
UK tax: nine grants and one LEAP
Each written call is its own disposal, dated when it is written; a buy-back is folded into it (s148, CG55545), and a lapse leaves it standing. The LEAP is a bought option: nothing is computed until it is sold, lapses or is exercised. The ledger is therefore ten computations: 8 grants in 2026/27, net £304.90, and one grant plus the LEAP sale in 2027/28, net £61.90. If other gains already use the £3,000 annual exempt amount, the 2026/27 tax is £54.88 at 18% or £73.18 at 24%; 2027/28 is £11.14 or £14.86 at this year's rates. The written calls and the LEAP sale go in the "other property, assets and gains" section of the SA108; a share computation from an assignment goes with listed shares (which SA108 boxes).
The trap specific to this structure is the split across 5 April. The grants' gains land in the year the calls are written, while the LEAP's result lands in the year it closes. Had Tesco been at 400p on 12 May 2027, the LEAP would have sold for about 20.00p, a loss of −£622.80 in 2027/28. That loss cannot be carried back against the 2026/27 grants; it is carried forward (across 5 April). Options cannot be held in an ISA, so the whole structure sits in a general account (wrappers).
The general rules, with HMRC's own examples, are on the tax worked examples page, and the counting rule is set out under counting computations.
Account, permissions and margin
At Interactive Brokers this pair counts as a diagonal with the short leg expiring first, which needs the Level 3 options permission and a margin account; a cash account can write a call only against shares it holds (account types and permissions). Held as a recognised spread, the broker's requirement is normally the net debit already paid, £772.80 here, because the long call expires later at a lower strike (spread margin). That protection lasts only while the LEAP is held: sell the LEAP with a short call still open and the call becomes uncovered. And the debit is the maximum loss only at expiry: an early assignment, as on 14 October, brings share dealing, SDRT and a short position into what looked like a capped trade (defined only at expiry).
The poor man's covered put
The same shape turned over is bearish: buy a deep in-the-money put with many months to run and sell near-dated, out-of-the-money puts against it. On Tesco it would stand in for a short sale of the shares, collecting the monthly premium while the long put carries the downside. Three UK differences follow from the puts. A deep in-the-money American put is exercised early when the interest on the strike is worth more than its time value, so the long put's early-exercise value comes from interest, not dividends (early put assignment). An assigned short put makes the writer a buyer of 1,000 shares, who pays the 0.5% SDRT on the strike. And a dividend lowers the share price, which helps a put holder. The diagonal spread page works a put diagonal through in full.