Relative volatility rank for covered-call overlays

An overlay, not a reason to buy

A covered call is described as limited upside with remaining downside, so it is treated as an overlay on a stock already owned after a strong advance, not as a reason to buy the stock. Covered-call writing sells a call against that held stock so that time decay can add income after the advance, at the cost of capped upside.

The suggested writing window is when the held stock has already had a good run and implied volatility has risen, so time decay can work for the seller. Implied volatility is the option market's current price of expected movement, judged against that name's own recent high-low range rather than an absolute level.

How relative volatility rank is built

Daily at-the-money call and put implied volatilities are averaged and stored through the last two weeks before expiration so the current reading can be compared with that name's own range.

Current implied volatility is placed inside a two-year high-low range split into 10 equal increments to produce a relative rank from 1 at the low end to 10 at the high end. Relative volatility rank is that placement, from cheapest to richest. One illustrated two-year range is 10 to 50.

High ranks sell calls, low ranks buy puts

Example sold contracts are out-of-the-money calls with a delta of 40 or less, or 30 or less, when implied volatility sits in the upper percentile group. Delta is a contract's approximate probability weight used to keep sold calls out of the money or keep bought options closer to the money.

When implied volatility ranks at the low end of the same grid, buying a put is presented as the cheaper hedge instead of selling a cheap out-of-the-money call. A hedge-strategy grid marks buy-underlying-and-buy-put at ranks 1 through 3 and buy-underlying-and-sell-call at ranks 8 through 10.

Five checks in one income procedure

An option-income procedure combines five checks used together: probability via delta, implied volatility, time until expiration, volatility skew, and market timing. That procedure's regime rule is to buy premium when implied volatility is historically low and sell premium when implied volatility is historically high.

The option-income strategy is a single rule set that sells premium only when relative implied volatility sits in a high rank band and switches to cheaper puts when the same rank is low.