Skip to main content
Track Covered call writing
19 / 25
Search the archiveLibrary
Library

2014issue C1232-37

Monthly buy-write construction with traffic-light exits

A historical covered-call book commits capital only at a monthly decision-time, ranks each buy-write by annualized-return-at-assignment and protection-level, and uses green, yellow, and red exit-conditions to rewrite, recover, or replace names.

  • New capital is committed only at the monthly weekend decision-time after the third Friday, weekly priority-screen results feed that gate, and every commitment is a stock-plus-short-call buy-write.
  • Strikes must clear more than 10 percent annualized-return-at-assignment, the kept strike is the one with the largest protection-level, and available cash is allocated to the highest cushions first.
  • Tenor follows a three-then-four-then-two-month expiration-ladder and is then shifted so expiration is not too close to an ex-dividend date.
  • Green, yellow, and red exit-conditions decide whether to rewrite the last-green-strike, place a recovery-overlay, or sell a name that fails the priority-screen and fund a new buy-write.
Entries in this reading3 entries
Current trackCovered call writing31 readingsOption income strategy43 readingsRule-based entry174 readings

A monthly operating book

The archive describes covered-call construction as a repeating monthly book, not a single standalone trade. Each holding is a buy-write: a long stock position paired with a short call and treated as one holding. Weekly results from a priority-screen feed one monthly decision-time, when new or replacement buy-writes are chosen.

The calendar gate

New capital is committed only at monthly weekend decision-times after the third Friday. Weekly screens feed those decisions, and every commitment is a stock-plus-short-call buy-write. The decision-time is the weekend after the third Friday of each month.

Book size after the priority-screen

Initial sizing uses a floor of 25000 currency units per buy-write and at least four names. Those names come after a selective screen that typically leaves fewer than ten priority candidates. The priority-screen is a selective weekly filter meant to keep names judged unlikely to fall substantially.

Strike, tenor and cash order

Call tenor is chosen on the expiration-ladder. The preference is three-month first, then four-month, then two-month. The chosen expiration is then shifted so it is not too close to an ex-dividend date.

Among strikes that produce more than 10 percent annualized-return-at-assignment, construction keeps the strike that maximizes the percent cushion from purchase price down to that strike. Available cash is allocated to the highest cushions first.

Annualized-return-at-assignment is the percent profit if the short call is assigned, scaled by 365 over days held, then increased by the annual dividend when one is assumed. Protection-level is the percent the stock can fall from purchase price to the chosen strike while the assignment-return target is still met.

Worked construction examples

In a worked example, a 35.12 purchase assigned at 36 after 91 days is 2.51 percent unannualized and 10.05 percent annualized. A 1.28 percent dividend lifts that annualized figure to 11.33 percent.

In a second worked example, a 37.50 purchase against a 36 strike implies a 4.0 percent protection cushion.

Green, yellow and red labels

At each decision-time a holding is labeled green if price is above the short-call strike, yellow if price has fallen modestly below that strike, and red if the decline is treated as substantial. That label is the exit-condition. It is assigned from price versus strike and from remaining assignment return.

The last-green-strike is the strike last set when the holding started or exited in the green state. Later yellow rewrites reuse this strike. If price is below the last-green-strike, the name stays yellow and that same strike is rewritten only when the best annualized assignment return across the next four expirations exceeds 5 percent. Otherwise the name is labeled red.

When a recovery-overlay is used

A broad-market drop of more than 15 percent over three months is treated as a major-market event, distinct from a 10 percent move treated as ordinary. Recovery construction then uses a recovery-overlay: a one-month short call struck 3.145 percent above the current stock price.

If that 15 percent three-month market drop has not occurred, a red name that still passes the priority-screen is kept on recovery rules. A name that fails the screen is sold and the cash funds a new screened buy-write.

S&P 500 annualized recovery after 15% three-month declines

Every S&P 500 episode with a three-month drop larger than 15 percent later recouped the loss at 10 to 38 percent annualized, fastest after 1970 and slowest after 2002 and 2008. The six rates are the annualized recovery column of the article's historical table, which is why a red, market-wide exit is rewritten into a one-month call struck 3.145 percent above the stock.
Every S&P 500 episode with a three-month drop larger than 15 percent later recouped the loss at 10 to 38 percent annualized, fastest after 1970 and slowest after 2002 and 2008. The six rates are the annualized recovery column of the article's historical table, which is why a red, market-wide exit is rewritten into a one-month call struck 3.145 percent above the stock.S&P 500 · major three-month declines, 1962–2008 · 1962-03-01T00:00:00.000Z to 2011-01-03T00:00:00.000Z

A major decline is defined as more than 15 percent in three months; a 10 percent correction is treated as normal. Recovery months run from the bottom date to the breakeven date. Printed annualized rates equal twelve times the monthly rate, not a compound annual growth rate.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
19 of 25 in the Covered call writing track
201733-33 pp.Next on Covered call writingLow-volatility covered calls need a real premium bufferA lasting drop in market volatility was described as leaving option premium unusually cheap and encouraging income sellers to understate a later volatility snapback.
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 year201489 readings
All 31 readings tagged Covered call writing
Also on Covered call writing5 readings
1995Sequenced covered-call repair after a growth-stock drawdown1996Covered-call writing as income and assignment discipline1997Relative volatility rank for covered-call overlays1999Covered-call income when implied volatility is cheap2000Covered-call income and assignment flexibility