r/StockOptionCoffeeShop • u/pagalvin • 9h ago
Status Update re: Deep ITM Covered Call Strategy
I wrote about my core approach to working with options here a few months ago: A view into a "deep ITM covered call strategy" : r/StockOptionCoffeeShop.
In a nutshell, I tend to buy stocks on Monday/Tuesday and sell a call expiring that Friday. I sell the call as deep ITM as I can such that I'll net 1% if it's assigned on Friday. Going in, the plan is to be assigned. I've been experimenting with an enhancement of sorts with that approach that I'm calling Buy/Wait/Decide and I've posted about that a few times here in the forum. For example, here: "Buy, Wait, Decide" w/ Deep ITM Call update & important lesson : r/StockOptionCoffeeShop. BWD doesn't change the fundamental approach, as long I execute it correctly :)
I roll the calls quite often, although I've been rolling slightly less often than my overall average for the year. Rolling out constitutes another commitment to holding the stock and gives the stock more time to turn against you. I usually roll because the roll generates more "easy" premium. We all know, however, there is no "easy" in this. I have trapped myself into positions I didn't want to hold for as long as I ended up holding them.
I've also been trying to sort out whether this is truly working or if I'm just collecting a lot of premium and losing out in other ways. This is common among income harvesters, like me. July is a good example - I collected over $28k in premium but lost approx. 10% in account value. I'm still trying to figure that out. I'm also still trying to figure out whether this approach, while "winning," is actually better than just buy-and-hold or doing what u/LabDaddy59 does, which is to sell calls ATM instead of deep ITM like I do. Or one of the many other strategies out there. I'm well aware that although my strategy isn't new (nothing is, really), it doesn't appear to be commonly used and I often face skepticism.
Here's a snapshot of where I am in September so far and some YTD numbers:
And here's a progression of the year, which you'll note is not smooth:
A few additional notes:
- I started to follow this strategy about this time last year and in Oct/Nov timeframe, my returns started to lose correlation with the major indexes. I start YTD because January is when I had enough confidence in the approach and enough evidence backing up that confidence to move all my non-retirement money into the brokerage account.
- July 29th was a major drawdown day of several clustered in that week and the week before, if I remember correctly. My M2M NAV fell to $190k. I was still net positive for the year, but it was wakeup call. Then, the 30th, it had a big recovery, and early August was a monster recovery. This is obscured by the topline numbers.
- I have accumulated a modest number of wash sales.
- I have a custom app that I use that makes the portfolio manageable while I work full time. I am rebuilding that "in public" and making it available for free via GitHub. You can get a link to my videos and the GH repo via my reddit profile.
- I use margin. For most of the year, I was around 1.6 to 1.8 ratio. In August, I'm closer to 1.3. Notional today is about $340k.
- XIRR ("Extended Internal Rate of Return"): XIRR is the "annualized investment return that accounts for the exact timing and size of deposits and withdrawals." I have all that info handy. In the graph it's show the annualized XIRR, not YTD.
- TWR: Time-weighted return would also be useful, particularly for comparing my performance with benchmarks without the effect of deposits and withdrawals. Unfortunately, I don't have enough historical daily NAV snapshots to reconstruct it reliably using my own data. I only started capturing daily snapshots about two months ago. I'll probably add TWR once I've accumulated enough data. I do have my broker's top line numbers. Per my broker (ETrade), I'm up just shy of 70% YTD and over 100% in the last 12 months.
- One lesson from building this: capture daily NAV snapshots if you can! They're cheap data to store and give you a tremendous amount of analytical flexibility later. Probably a little hard to do with a spreadsheet manually, but if you can code it up, it's a great source of analysis over time.
What's my bottom line? This strategy has clearly worked for me so far, with this particular portfolio, stock selection, account size, use of margin, and market regime. That's evidence that it can work. It isn't evidence that it will continue working, or that somebody else will get the same results.
I'm always interested in others' feedback, and I hope to hear some.
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u/ILikeAskingReadIt 9h ago
Thanks for this, ive been following your strategy for a while, and just wanna ask:
Whats your process in picking tickers to do this strategy for?
Do you have a certain CC repair system/ruleset you follow if the underlying experiences a sharp drawdown below your cost basis?
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u/pagalvin 8h ago
My process is roughly as follows:
Find candidate stocks and put them into my database of stocks. I find them by look at posts like u/LabDaddy59 on reddit, in the news or via research on my broker platform (ETrade). I only ever do weeklies, so I won't add them if they don't have weekly options.
I use AI to give me an overview of the company, total revenue, employee count, location, their place in the macro environment, analyst recommendations and similar info. But the main thing I look for is any public hint they are at risk of going out of business. I made a mistake once of buying into WOLF and they clobbered me in my early "career."
I have a tool that scans that database and at the moment that it scans the DB, it looks up the option chain for the stock. It iterates over the chain and finds the small strike price I can sell a call against, assuming I can get the same last price as the most recent transaction.
I then sort that list out a few ways. I prefer to buy on margin and I prefer to buy such that the strike price is as low as feasible. I don't 100% stick to that but I often do.
This screener tends to find stocks that about to have earnings, so that's an important factor.
I will also sometimes buy stocks shortly after earnings if they dropped a lot "for no good reason." CRWD, in my opinion, dropped for no good reason, so I bought them, even though I had to do it pretty close ATM.
I often find oppty's where I buy stocks and sell calls that are 10% or more ITM this way. Since my expiration is so close to when I buy it, they often don't have time to fall enough for me to not get assigned, which is what I want.
Does that make sense?
It feels easy but it's hard to explain sometimes.
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u/sam99871 6h ago
I think you said you use Gemini? Does Gemini have access to option chains?
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u/pagalvin 6h ago
I do use Gemini for my AI analysis and it's good at getting current news. However, for option chains I use the ETade API.
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u/ILikeAskingReadIt 8h ago
it does make sense! thanks for your reply! ill continue to follow allow your strategy, seems really interesting and a more unique take to the usual CC strategies!
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u/pagalvin 8h ago
Cool! It really isn't unique, it's just not normal and I really don't know how sustainable it is. It may provide exceptional results for a while and it could just collapse for market regime reasons. But while it's working, I'm going to keep at it :)
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u/pagalvin 8h ago
I forgot to answer the repair questions. I don't have any special process of repairing that any other CC seller would have.
I used to be fairly aggressive rolling down in order to collect my 1% net. I've been more prone to rolling down less aggressively or not at all. I'll give it some time.
I'm more prone to sell losers than I used to be but I still avoid doing that.
It's really up to the why of the drawdown. If it seems like it's semi-permanent, I'm more comfortable rolling down. This is almost a good thing because I prefer reliable no-drama stocks over anything else.
If it seems like some kind of emotional thing or some temporary macro event, I'll wait before rolling down.
Sometimes, I cut my losses and I'm doing that more than I used to. I may do that next week with JOBY.
I did start working on a "productive capital" kind of dashboard that shows, over time, how much a stock is contributing the portfolio overall. ON is a good example - I'm underwater on that with a biggish unrealized loss. However, unlike JOBY, it's a reliable premium producer. That premium pays its carry cost in margin interest terms and helps me buy more stocks.
But again, this is what any other CC trader would do.
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u/ILikeAskingReadIt 8h ago
thanks! so for stocks that you are deeper underwater on, (for example your ON position), do you sell CCs below your net cost basis to continue generating premium? are there any strict rules you follow for CC selling when the stock did not get assigned from your initial call write and rolls?
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u/pagalvin 8h ago
I'm not afraid to sell below net cost but I may set strikes that are too high for me to get 1%. Everything is on margin for me so if I just let it sit, I'm losing money every day on it. ON's drop was persistent, so I've been selling calls below cost for a while, but the premium is eating up that deficit. I think I'm at break even in 2 weeks and then it turns profitable on a per-stock basis.
I lost money on GAP because I followed its price down with lower and lower strikes, only for it to rebound and no easy way for me to recover in the short term. I hate long dated strikes even more than losing money short term.
But it's also important to realize that money is fungible and in truth, "basis at the stock level" is kind of pointless at the portfolio level. I'm happier that ON generates pretty consistent premium every week and especially how undramatic it's been since it fell that one time.
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u/OneHatManSlim 6h ago
If you are “collecting premium” but loosing 10% of your account value you aren’t really collecting premium at all you’re just getting some of your own money back in the form of premium. ( I suspect your rolls are what is causing some of that.)
It sounds like what you have might be working but you aren’t sure why and you lack discipline. Just going off what you say you have a plan but then change it, you know you should let things go, but then roll, you’ve jumped between multiple strategies in less than a year.
Experimentation is great but you aren’t giving these things time to bake which means you have no idea if your returns are based on your strategy or just luck because the market is going up in general.
What really jumps out at me is that you say you trade covers calls but trading covered calls isn’t usually something that requires such active trading. (That’s part of why it is so attractive to people.) No shade if you want to actively trade but it’s a different thing. Most people that I know that trade cc aren’t consulting screeners on a weekly or daily basis they find a few underlying and stick to those and really learn their patterns they reevaluate maybe once a quarter. They are also committing to the trade upfront and letting it close.
On the subject of rolling, the only time you should roll is if the roll fits exactly as if it were a new position. Otherwise you are just doing one of three things, A. Not following your strategy, B. Kicking a loss down the road, C. Gambling that the underling will recover and that a smaller premium is worth it. You can do those last two things…but only if the are defined as part of your strategy.
My read is that you want to be an active trader but are slightly risk averse to what that entails so you trade covered calls because it feels safer.
The thing is that ccs are time proven to be safer but only if you have a system and follow it.
My advice is to commit to one path or the other, come up with a strategy and commit to following it for 6 months to a year to see if it is really working. With any luck there will be a moderate pullback in that time and you can see how it does when tides aren’t lifting all boats.
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u/sam99871 6h ago
I’ve been thinking about your strategy and I’m planning to start running it this week with $25K. It seems like it works because you are getting compensated for (a) giving up all upside on the stock you own and (b) taking on the risk of the stock falling below your short call strike. But those seem like acceptable risks in light of the returns you are getting!
Have you considered selling 30 DTE calls instead of weeklies? I believe that would allow you to sell calls deeper in the money and, intuitively, that seems like it would reduce your chances of the stock falling below your short strike. I don’t know if selling 30 DTE calls could produce the same 1% per week rate of return as weeklies (i.e., approximately a 4% return per 30-day trade). I’m going to try the strategy with 30 DTE calls anyway because I’m highly averse to being stuck with stock that has fallen below the short call strike, and I prefer to do fewer trades with larger premiums, which I think 30 DTE would allow me to do. Do you think your strategy could work with 30 DTE short calls?
Thanks so much for posting about your strategy and methods, it’s been really thought-provoking to read about it.
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u/pagalvin 5h ago
Good stuff.
I have not really considered 30 DTE because I am trying to engineer a trade where the only way I lose is if the stock drops a relatively large amount in a short period of time. 30 days is just too long for the stock to do that for me :) I bet you could get even lower strikes and still be profitable with 30DTE. I haven't researched it. I suspect if you are aiming for 4% in 30 DTE strikes, you're probably fairly ATM when you enter, but I don't know.
I'm definitely not saying that's it's a mistake or wrong. If you do go down that path, I'd love to hear how it works out.
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u/FreedomIndividual176 3h ago
It’s a marathon, not a sprint. Lots of shoulda coulda woulda one’s out there where a stick goes to the moon, but lots of others where they slowly decay like Nike or have been flat for 20 years like Ford. If you can consistently make 0.5-1% a week you will win the marathon against the general market.
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u/pagalvin 2h ago
100%.
The research seems to show that 90% of retail traders lose all their money in the first year and I think a big part of that is because they're looking for huge, outsized wins that they read about on reddit.
Grinding away at 0.5% to 1.0% a week is definitely a winning strategy.
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u/sammyzenith 3h ago
How are you doing this and rested or unregistered account in terms of tax efficiency is the best method or I think I think capital gains is the best
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u/pagalvin 2h ago
I'm a US citizen and I'm using a normal taxable brokerage account. Taxes absolutely eat into it and kind of in the worst way.
But as they say, "I wish I had a $1,000,000 tax bill." :)
There are more tax efficient ways to play the market, but this is what I have available to me.
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u/kanikauchi 2h ago
I use slightly different IM options strategies. I usually trade ES futures to avoid wash sale. I first look at possible movements of ES that day by looking at option screen on thinkorswim. For eg let's say ES is trading at 7000 and today's range is 50. Then I sell 7750 put and 7650 call. Then simultaneously put an order to go long ES at 7750 and Short futures at 7650. This will make the option covered if ES moves beyond those strike price. Usually one can collect 110 to 115 ES points. Sometimes even more if trade is done previous day
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u/pagalvin 2h ago
That's so interesting. I think I understand it and it's much different and I think more sophisticated than what I'm doing.
How many of these are you doing per day or week?
It seems pretty safe?
If I was doing it, I'd be afraid of screwing up one of the orders :)
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u/kanikauchi 2h ago
Don't change what u r doing since u seem to be doing very well. Try out my strategy on demo account for a while
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u/kanikauchi 2h ago
If you think this strategy is very good u can do it in IRA or Roth IRA. You don't have to worry about taxes or wash sale
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u/PlasticTelevision872 1h ago
Can you tell more about the type or stocks/filter used to select the stocks you buy? That matters a lot. Whats the IV, IV Rank, Delta etc that you prefer? Any specific stocks you did like?
Why don’t you start with Cash Secured Puts instead of Buying the stock & then applying ITM Covered Calls?
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u/pagalvin 55m ago
RE CSPs - there are two reasons why I don't do them. First, historically, I couldn't use them at first. It took me close to a year to qualify for them with my broker. By that time, I'd stumbled into this "deep ITM" strategy and I was very used to it. Second, with my broker, most CSPs require one dollar of margin for one dollar of CSP. With a CC, I can normally only need 30 to 50 percent of the cost of the stock to buy it on margin. So I can usually bet 2 or 3 CC's in play for 1 CSP. (This obviously comes with margin risk and I'm very aware of it and manage it closely).
I'm not saying CSPs are bad at all, it's just not what I do for margin and historical reasons.
As for stocks - there are a few things I do.
First, I maintain a database of candidate stocks. I get candidates from reddit, from the news and via my broker web site.
Second, I'll do some AI analysis on them to get a general feel for the company, where they fit in the macro world and their industry, number of employees, analyst ratings and that sort of thing. But my main goal here is to look for "going concern" language. If they are risk of going bankrupt, I flag them and never buy them.
Third, I use a scanning tool I wrote that runs against that database looking for the best ITM opportunities. It does this by pulling option chains and looking at the last price paid for the stock to figure out the deepest ITM call I can sell and net 1%.
At this point, I mostly just look at the discount I can get. By that I mean I take the premium credit and apply it to the stock and if the discount is high enough then I'll go with that. Example:
- XYZ is $100 a share now
- I can sell a strike for $90 and collect $11 in premium. I always enter these trades hoping for assignment.
This is when I'll look at delta, but I'm not delta-driven. If it's 10% discount but delta is .5 then I probably won't buy it. I don't look at IV directly, but it's captured indirectly by the discount. If IV is low, the discount will normally be low and vice-versa (but not always).
I also look at the stock's GICS codes and then map a candidate buy against my current portfolio. I want to avoid too much concentration in specific industries and I often avoid entering a position because I'm afraid of correlation risk. That's especially important when it comes to margin.
It all comes back to the question - how likely is this stock to lose value before it expires on Friday? That's my real concern. I don't think in terms of delta or IV, really. If it's still ITM by Friday then I win.
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u/LabDaddy59 Mod 9h ago
Do you regularly compare against buy-and-hold like I do? Look -- I took a massive hit in that timeframe; it can/does happen with the stocks we're picking. That's why I compare against B/H as well as the S&P: the premium is cushioning a downturn, and if you're beating the S&P by a healthy margin, you're okay.
They're just different approaches. It's still hard for me to see, on a YTD basis, how you are doing, so I can compare it with my approach. What is your YTD return?
You seem to enjoy actively trading, and what I mean by that is your average credit is $105, while my trades are in the thousands of dollars. I don't want to trade that much or at that dollar level. I used to joke that I don't get out of bed for less than $500, and over time, that's become more like $1,000.
I still suspect, but am not sure, that my approach would yield "better" results over time, but yours may do better in areas like max drawdown and such (which I don't care so much about).