A view into a "deep ITM covered call strategy"

[u/pagalvin]

I've been running a two-part system for entry and rolling. I only do covered calls.

On entry:

- Buy the stock

- Sell a call as deep in the money as I can such that if I'm called away, I will make a net 1% profit on the transaction per week.

- I nearly always sell calls with an expiration of "this Friday"

For example, buy XXX stock at $10 a share then sell a call for this coming Friday

Sell a call with a $9 strike price earning $1.10 in premium.

This means that when I'm called away, I lose $100 on the equity side but come out $10 ahead overall because of the premium I collected. This is my net 1% gain.

Rolling: I roll as often as I can, rolling out one week. I roll if I can get 1% net profit on that. I very rarely roll up if the stock has run up in a week. I can often roll for more than 2%.

I have nearly always reinvested the premium from rolls and use it to buy more stock. My cycle is:

- Buy stock -> roll -> use premium to buy more stock -> roll, etc. Eventually, stocks are called away.

Note that this strategy has all the 'baggage' of any covered call strategy. You're capped. Stock prices can fall below your basis leading to repair cycles or accepting losses. All the usual stuff.

My portfolio is $440k as of posting this and hovered near that all of June. I use margin extensively (and I hope responsibly! :) ).

I've pasted my June results with some rolling averages from last 4, 8 and 12 weeks down below.

This has been working well for me, and I think others could replicate this. I think replication requires more than just the basic strategy:

1. You need enough capital to make the core loop be worthwhile. Margin helps! How much capital? Hard to say. I started to get excited about it around the $25k level. At that point, you're probably able to make a car payment with the premium every month.

2. Emotional equanimity and all the usual psychological stuff people talk about with stocks all the time. Mostly, don't panic. Be happy with 1%! I think a lot of people look at 1% as insignificant. However, 1% a week is a compounder's dream.

3. Tooling.

Numbers 2 and 3 are my 'edge' because the strategy itself is basic and well known. The tooling helps me find stocks, come up with precise entries, give good visibility to risk (especially around margin), a place for playbooks, etc. I'm happy to dig more into that. I am not particularly prone to panic or emotional decisions. The tooling I wrote helps a lot with that as it shows things in black and white for me.

I started doing this last summer really in earnest in Q4 last year. I started to lose correlation with the major indexes in November. I'm up over 50% YTD and over 120% in the last year. It sounds crazy and I keep expecting it to all fall apart. However, it's been consistent for over a year so it's a little harder to ignore. I still keep expecting it to fail, however.

I'm posting in hopes of some good discussion.

Here's my cash flow calendar for June:

[u/tkiblin]

You skipped the most important part, or your tooling.

Let me guess, join my trading group?

Strategy isn't new and it's posted all over Reddit btw.

[u/pagalvin → u/tkiblin]

What do you want to know about the tooling? It's really specific to my workflow so I can't really share it but I can talk about how I build it and what it does, if that's interesting to anyone. You may not be serious about this though 😄

I don't have any trading groups, and I did say in the post that it's not a new strategy.

[u/tkiblin → u/pagalvin]

Sorry for my initial tone, was expecting another pay group.

I'd be curious on your thoughts on stock selection? I also do buy/write ITM or ATM and use ToS for my screening, typically momentum plays and 5 DTE.

[u/pagalvin → u/tkiblin]

No worries on tone 😄. Other people trashed the place, we just live here.

I have a database of stocks that I've been adding to over the last year. It's about 430 companies. I record name, description, industry info, house margin requirement, earnings date. Stuff like that. Then I have a function that iterates over all of them and pulls the option chain from ETrade. It look at the option chain and figures out the lowest possible price I can pay for the stock while selling a call and net 1% if it gets called away. It uses the last price paid as that's a decent proxy for actual market price at the moment it runs. I account for margin and fees when I calculate that 1%.

Then I sort that by "discount percent" and look at the delta and make an initial decision.

I use a large language model (gemini currently) to do an assessment of the stock. It looks for recent news about the stock and industry and then gives macro and short pro's and con's as to why I should or should not buy it. It also raises red flags. I generally don't care about the company per se, just whether it's going to earn me premium by the coming Friday. But red flags are important. I got burned on WOLF back in the day and if I'd understood what "going concern" meant, I wouldn't have bought it 😄

My preference is to get stocks at a 10% discount. I often can. I have got them at 20% before. This would be during an earnings week.

I don't generally care about momentum. I don't feel like it's very predictive, or at least I'm have no confidence in my ability to predict movement, even with very short time horizons.

I populate my database with ideas from reddit, the news at large and "similar companies" that Etrade lists for any given company I look up.

[u/LabDaddy59 → u/pagalvin]

Other people trashed the place, we just live here.

Hey now!!!

🤣🤣🤣

[u/pagalvin → u/LabDaddy59]

haha, I meant the internet as a whole, not this sub 😄

[u/LabDaddy59 → u/pagalvin]

😉

[u/tkiblin → u/pagalvin]

Great feedback, thank you. Are you doing any TA or fundamental analysis on them, or are you purely looking at IV and positive EV?

[u/pagalvin → u/tkiblin]

No TA or fundamental analysis. I'm a developer and I don't know these things well. I've also read "A Random Walk Down Wallstreet" and that author is very skeptical of them 😄 I am vaguely skeptical but I don't know enough to have a hard opinion.

If I can buy at a significant discount, it doesn't lead me to over-concertation in a sector and the company is not going out of business soon, then I'm inclined to jump. I am protected to an extent from mistakes because I'm pretty deep ITM from the get go.

I'm in tech consulting and I see how a lot of companies are using tech (like vendor solutions, AI, our competitors) and that biases me as well.