Strategies
In the money (ITM) Covered Call
A defensive theta setup where time decay matters more than a large price move.
Description
What matters most
The strategy uses 100 shares or ETF units plus a short ITM call. The main edge comes from the extrinsic value of the short call rather than from chasing a big directional move.
The strike should sit below the expected move of the cycle. In addition, the annualized return should be at least 20% to justify the capital usage.
You can run a live scan for candidates in the OWS Tools.
One clear drawback is the missing upside. If the underlying rallies strongly, you do not meaningfully participate in that extra move because the short call caps the gain.
If the stock drops hard and ends below the strike into expiration, you can roll, sell the stock, or use an earlier active exit such as a stop around 10% in the underlying.
Example: MSFT
- Spot 395.55 USD with 14 DTE and a 20 USD expected move.
- Strike Short call at 370 USD.
- Time value 28.00 minus 25.55 = 2.45 USD per share.
- Annualized About 11.9% per year on a strike basis, therefore below the 20% filter.
A scan for suitable stocks and ETFs can be run with the OWS tool. The included heatmap helps estimate whether a position is worth taking.
Inspired by: Theta Profits.
P/L Diagram
Schematic at expiration
Downside stays stock-like, while upside is capped once the call strike is reached.
Summary
Key points
- Thesis Theta and time decay are the real assumption.
- Strike ITM and below the expected move of the cycle.
- Return At least 20% annualized as a filter.
- Upside Strong rallies leave little additional participation.
- If it drops Roll, sell, or use an active stop around 10%.
- Scan Live scan via the OWS Tools.