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1997issue C121-4

Covered call time, probability, and implied volatility

A 1998 archive case treats covered call writing as a short-horizon check. Implied volatility analysis and remaining calendar time produce a finish probability, and option premium analysis asks whether that overlay still belongs against owned shares.

  • A short-horizon formula using remaining time, strike, spot, interest rate, and implied volatility can estimate the chance a call finishes in the money before the next expiration window.
  • Selling out-of-the-money call premium against owned shares was presented as typically favoring the seller about two-thirds of the time, with about a one-third chance the stock would be called away.
  • Lengthening the Dell horizon to January 1998 raised the estimated 75-strike call probability, so calendar time is part of the same check as implied volatility.
  • Maximum hedge effect was described as covering half the position about two weeks before expiration and the remainder on a price surge, with further out-of-the-money calls, buy stops, or closing the option as follow-ups.
Entries in this reading3 entries
Current trackCovered call writing31 readingsOption premium analysis47 readingsImplied volatility analysis70 readings

Time and probability around a covered call

A short-horizon probability formula using remaining time to expiration, strike, spot, interest rate, and implied volatility can estimate the chance a call finishes in the money before the next expiration window.

Covered call writing in the archive placed that estimate on out-of-the-money call premium sold against owned shares. Implied volatility analysis supplied the volatility input. Option premium analysis used the resulting finish chance as context for keeping the overlay.

Archive context for selling premium

Selling out-of-the-money call premium against owned shares was presented as typically favoring the seller about two-thirds of the time, with about a one-third chance the stock would be called away.

Clearing-house economists were cited as reporting that, on average, 67 percent of options expire at zero or at a loss, used as supporting context for selling out-of-the-money premium.

The February 1997 Dell worksheets

In a February 1997 Dell example, February 75 calls were sold for one-half to three-quarters while the stock was in the mid-60s, using 55 percent implied volatility and a 0.07 interest rate with about 0.0493 of a year remaining.

The same Dell February 75 setup produced an estimated 14 percent probability in the first worksheet and a 31.30 percent call probability at a 66 spot, implying a 68.7 percent chance of collecting premium while keeping the shares.

The path into expiration

Despite a surge to 76 on February 19, 1997 that lifted the option to 1 3/4, Dell closed at 71 1/8 on February 21 and the 75 call expired worthless.

What a longer window did to the odds

Lengthening the horizon to January 16, 1998 with Dell at 66 and a 75 strike raised the estimated call probability to 40.34 percent, while a two-week window at 71 still showed 38.26 percent.

A tabulated short-horizon case with Dell at 71, 15 days to a 75 strike, 40 percent implied volatility, and a 0.07 rate estimated a 38.26 percent call probability and a 61.74 percent put probability.

Dell 75-call finish probability at 18 versus 280 days

A covered-call seller should see that remaining calendar time, not the one-dollar price steps, does most of the work. With Dell still at 66 and implied volatility held at 55 percent, the 75-strike call-away curve stays nearly flat near 38 to 43 percent when 280 days remain, but steepens from about 22 percent at 61 to 41 percent at 71 when only 18 days remain. Both series are the article’s printed probability worksheets (3 February 1997, expiry 21 February; and 11 April 1997, expiry 16 January 1998), not a digitised price chart.
A covered-call seller should see that remaining calendar time, not the one-dollar price steps, does most of the work. With Dell still at 66 and implied volatility held at 55 percent, the 75-strike call-away curve stays nearly flat near 38 to 43 percent when 280 days remain, but steepens from about 22 percent at 61 to 41 percent at 71 when only 18 days remain. Both series are the article’s printed probability worksheets (3 February 1997, expiry 21 February; and 11 April 1997, expiry 16 January 1998), not a digitised price chart.DELL · 18 days vs 280 days to 75-strike expiry

Both worksheets fix the 75 strike, 55 percent implied volatility, a 7 percent risk-free rate, a 66 dollar Dell spot, and zero dividends. Only time to expiration changes.

Follow-up controls on the overlay

Maximum hedge effect was described as covering half the position about two weeks before expiration and the remainder on a price surge, with further out-of-the-money calls, buy stops, or closing the option used as follow-up controls.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
4 of 25 in the Covered call writing track
19991-5 pp.Next on Covered call writingCovered-call income when implied volatility is cheapCovered-call writing starts from stock already owned and sells a call about two strikes above the market with roughly two months remaining.
All readings on this track · 25 readings
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  2. 1996Covered-call writing as income and assignment discipline
  3. 1997Relative volatility rank for covered-call overlays
  4. 1997Covered call time, probability, and implied volatility
  5. 1999Covered-call income when implied volatility is cheap
  6. 2000Covered-call income and assignment flexibility
  7. 2002Covered-call expiration rate versus expected value
  8. 2003Covered-call versus diagonal housing after a single-name drawdown
  9. 2003Covered-call overlay on a stock portfolio as a payoff case study
  10. 2003Ratio backspread and covered-call assignment construction
  11. 2004Covered-call income is not a safety net
  12. 2006Evaluating consecutive covered calls across market regimes
  13. 2007A job-first audit of commodity options in a futures book
  14. 2011Horizon checks on Covered call writing, the risk-reward ratio, and the Relative Strength Index
  15. 2012From ex-date verticals to leftover buy-writes, and a call backspread that stays net long
  16. 2013Year-long covered calls on high-yield industrials
  17. 2014Year-horizon covered calls on Dow yield ranks
  18. 2014Covered-call premium as a cost-basis cushion
  19. 2014Monthly buy-write construction with traffic-light exits
  20. 2017Low-volatility covered calls need a real premium buffer
  21. 2017Covered-call futures income as one testable procedure
  22. 2018Partial covered-call overlays at targets, resistance, and rich volatility
  23. 2019Weekly covered-call writing as a two-book credit-spread case
  24. 2019Weekly option income as one holding-period case
  25. 2019Locking long-call profit with a temporary overlay
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All 31 readings tagged Covered call writing
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