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2017issue C1133

Low-volatility covered calls need a real premium buffer

A lasting drop in market volatility left option premium unusually cheap and encouraged income sellers to understate a later snapback. A March corn covered-call example shows a distant 3.90 call sold for 0.07 barely moving the loss point, while a 3.60 call sold for 0.20 collects more premium and shifts breakeven closer.

  • A lasting drop in market volatility was described as leaving option premium unusually cheap and encouraging income sellers to understate a later volatility snapback.
  • Aggressive naked selling of deep out-of-the-money futures options was framed as a poor fit; markets near long-term highs or lows were identified as more suitable for covered call writing and covered put writing.
  • A 3.90 call sold for 0.07 against long March corn near 3.60 only lowered the cushion to about 3.53, capped profit near 0.37, and still left a 0.25 adverse move losing about 1250 before costs.
  • Selling a 3.60 call for 0.20 was presented as a proximal strike that collected more premium and moved breakeven closer, but low implied volatility could still inflate the short call on a sharp rally.
Entries in this reading3 entries
Current trackCovered call writing31 readingsOption income strategy43 readingsImplied volatility analysis70 readings

Cheap volatility and understated snapback

A sharp, lasting drop in market volatility was described as leaving option premium unusually cheap. Implied volatility is the price the options market is charging for expected movement. When it is unusually low, an option income strategy collects little risk buffer: the underlying does not have to move far against the position before collected premium is used up.

That cheap-premium setting was also described as encouraging income sellers to understate a later volatility snapback. Strike choice, entry, and abstention stay one testable rule set. A distant short call is still part of that procedure, not a separate income add-on.

Covered writing near long-term extremes

Aggressive naked selling of deep out-of-the-money futures options was framed as a poor fit for that cheap-volatility setting. Markets near long-term highs or lows were identified as more suitable settings for covered call writing and covered put writing than for that aggressive naked selling.

Covered call writing owns the underlying futures contract and sells a call against it so premium can offset some decline while gains above the short strike are given up. Covered put writing is the short-futures counterpart that sells a put against a short underlying position near a long-term extreme.

The March corn overlay

A long March corn futures entry near 3.60 with a 3.90 call sold for 0.07 only lowers the downside cushion to about 3.53. The risk buffer is that short stretch between the futures entry and the premium-adjusted loss point.

That distant-strike overlay was calculated to cap maximum profit near 0.37, or about 1850 before costs, while a 0.25 adverse futures move would still lose about 1250. The distant, cheap short call was criticized for capping upside without buying enough error room to justify giving up gains beyond the strike.

A proximal strike and a cheap call

Selling a 3.60 call for 0.20 instead of the 3.90 call for 0.07 was presented as collecting more premium and shifting breakeven to a closer, more attainable level. That closer listing is a proximal strike: extra premium is large enough to change breakeven and the odds of reaching the capped maximum.

Because implied volatility was already low, a sharp rally could still inflate the short call enough to frustrate the overlay even when the long futures side worked.

March corn covered-call premium and implied downside buffer

A $3.90 call sold for seven cents barely lowers the $3.60 long’s loss point, while a $3.60 call sold for twenty cents collects more premium and moves breakeven closer. The bars use the premiums and buffers stated in the March corn overlay, not a digitized plot.
A $3.90 call sold for seven cents barely lowers the $3.60 long’s loss point, while a $3.60 call sold for twenty cents collects more premium and moves breakeven closer. The bars use the premiums and buffers stated in the March corn overlay, not a digitized plot.March corn · November 2017 column example · 2017-11-01T00:00:00.000Z to 2017-11-30T00:00:00.000Z

Premiums are as quoted in the article, before commissions and exchange fees. The distant-strike buffer is $3.60 minus $0.07; the proximal strike collects $0.20 at the futures entry itself.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
20 of 25 in the Covered call writing track
201734-39 pp.Next on Covered call writingCovered-call futures income as one testable procedureA long futures contract plus a short at-the-money call can remain profitable if the market rises, holds, or declines by less than the collected premium by expiration.
All readings on this track · 25 readings
  1. 1995Sequenced covered-call repair after a growth-stock drawdown
  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
By fieldOptions and volatility171 readingsBy year2017100 readings
All 31 readings tagged Covered call writing
Also on Covered call writing5 readings
1997Relative volatility rank for covered-call overlays1999Covered-call income when implied volatility is cheap1995Sequenced covered-call repair after a growth-stock drawdown1996Covered-call writing as income and assignment discipline2000Covered-call income and assignment flexibility