Synthetic Covered Call: The Two Trades That Copy a Covered Call for Less

Synthetic covered call: a stack of 100 share certificates beside cards for the short put and LEAP plus short call versions

The covered call has one barrier that stops most new traders cold: you need 100 shares. On a $50 stock that is $5,000 tied up before you collect a dollar of premium. On a $300 stock it is $30,000.

A synthetic covered call is any position that produces the covered call's payoff without buying those 100 shares. There are two of them, they are not the same trade, and the confusion between them costs people real money. After 22 years of trading derivatives, I use both, for different jobs.

Key Takeaways

✅ A synthetic covered call copies the covered call's profit and loss profile without owning 100 shares.

✅ Version one is a short put. Its payoff is mathematically identical to a covered call at the same strike and expiration.

✅ Version two is a LEAP diagonal, better known as the poor man's covered call. It caps your risk but is not payoff-identical.

✅ The short put needs less capital than shares and far less management. The diagonal needs the least capital of all and the most attention.

✅ Neither version pays dividends, and neither gives you a share position you can hold forever.

Version One: The Short Put Is the Real Synthetic

Put-call parity is one of the few things in options that is not a matter of opinion. It says that owning 100 shares and selling a call against them produces the same payoff as simply selling a put at that same strike and expiration.

Not similar. The same shape, line for line.

⚡ Covered call: buy 100 shares at $50, sell the $52.50 call for $0.95. You keep gains up to $52.50 and eat the decline below $50, cushioned by $0.95.

⚡ Synthetic version: sell the $52.50 put for about $3.40. Your best case is keeping the premium. Below $52.50 you are effectively long the stock from $49.10.

Run those two side by side at any price on expiration day and the numbers land in the same place, minus small differences for dividends and interest. That is why a short put is the textbook synthetic covered call, and why the strategy shows up under both names in broker education material. The full mechanics of selling a put are worth reading before you place one, because the order ticket looks nothing like a covered call even though the risk is the same.

What you gain

📌 One commission instead of two. No share purchase, no call sale, no separate exit on each leg.

📌 Less capital, sometimes much less. Cash-secured, you set aside the strike value. On margin, brokers typically require a fraction of that.

📌 Nothing to manage between now and expiration. One position, one decision.

What you give up

📌 Dividends. You do not own shares, so you collect none. On a 3% yielder that gap is real.

📌 The long-term holding. A covered call seller who gets called away still owned the stock for the ride up. A put seller never did.

📌 Approval levels. Some brokers gate short puts above covered calls even though the risk is identical, which is a quirk of regulation rather than of math.

If the cash-secured version is where you are starting, the cash-secured put strategy is the same trade with the assignment money parked in advance.

Version Two: The LEAP Diagonal

The other thing people call a synthetic covered call is a diagonal spread: buy a deep in-the-money LEAP call a year or more out, then sell short-dated calls against it month after month. The LEAP stands in for the shares.

This is the poor man's covered call, and it is the cheapest way into the covered call income engine. A LEAP at 0.80 delta might cost a third of what 100 shares cost, which is why small accounts reach for it.

Be clear about what it is not. It is not payoff-identical to a covered call, the way the short put is. The LEAP has its own time decay, its own volatility exposure, and an expiration date of its own. In a sharp decline the LEAP falls faster in percentage terms than the shares would. In exchange, your maximum loss is capped at what you paid, which shares never are. If you are choosing the LEAP itself, how to buy LEAP options covers the delta and expiration choices that make or break the position.

Which One Should You Use?

I pick by what the position is for.

⚡ You want income and would happily own the stock: sell the put. Simplest, fewest moving parts, and if the stock falls you end up owning shares you wanted at a discount. That is the entry point into the wheel strategy.

⚡ Your account cannot carry 100 shares or the strike value: the diagonal. It is the only version that fits a genuinely small account, and it accepts more management in return.

⚡ You already own the shares: neither. Sell the call against what you have. A standard covered call keeps the dividends and the long-term position.

When I was doing institutional backtesting, the pattern that kept showing up on the call side was that roughly 30-delta short calls collected meaningful premium while leaving assignment uncommon, and on the put side something near 0.20 delta did the same job. Those are starting points for strike selection, not rules, and the options Greek cheat sheet explains why delta is the number to anchor on. Whichever version you choose, run the return math before you enter, which the covered call calculator makes quick.

The Mistake That Applies to Every Version

All three structures cap your upside. That is how they pay you. The premium is rent, and like any landlord you have agreed in advance to a fixed amount rather than an unknown one.

Early in my career I capped a position that was genuinely going somewhere, convinced it had run out of room. It had not. The upside I signed away dwarfed years of premiums I had collected elsewhere. The lesson has not changed: rent out the steady names, and do not cap the rockets. A synthetic covered call makes it cheaper to enter that bargain, which also makes it easier to enter it on the wrong stock.

Frequently Asked Questions About Synthetic Covered Calls

What is a synthetic covered call?

A position that reproduces the covered call's profit and loss profile without owning 100 shares. The strict version is a short put at the same strike and expiration, which put-call parity makes payoff-identical. The looser version is a LEAP diagonal, also called the poor man's covered call.

Is selling a put the same as a covered call?

At the same strike and expiration, the payoff diagrams are the same shape. The practical differences are dividends, which only the shareholder collects, capital requirements, which usually favor the put, and broker approval levels, which often treat the put as riskier despite identical risk.

Does a synthetic covered call need less capital?

Usually yes. A cash-secured put sets aside the strike value rather than the full share purchase. On margin the requirement is a fraction of that. A LEAP diagonal typically costs a third or less of the share price, which is why small accounts favor it.

What is the biggest risk of a synthetic covered call?

The same risk as the covered call: a large decline in the stock, cushioned only by the premium you collected. The short put version carries that risk down to zero just as shares do. The diagonal caps the loss at the LEAP's cost but adds time decay and volatility exposure on the long leg.

Learn strike and expiration selection on real trades: the Options Trading in 21 Days course.

Final Thoughts

The covered call is the strategy most new income traders want and the one their account size most often blocks. Both synthetics solve that, differently. The short put solves it with math, giving you the identical payoff for less capital and less work. The diagonal solves it with leverage, giving you a smaller entry ticket in exchange for more to manage.

Pick the one that matches your account and your intention, then size it like the stock position it really is. The Options Clearing Corporation and Cboe's education library both publish the contract specifications and settlement details worth knowing before you place either one.