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Ratio Covered Calls

I’m a huge fan of ratios, which enable more nuanced risk profiles.


A known downfall of covered calls is capped upside potential. The workaround? A simple ratio.


If we have 100 long deltas (via long shares) and sell 1 call, we have a maximum of -100 short deltas. This limited our upside profit potential to the short strike.


An alternative approach is to create a ratio of long deltas to short. For example, if we have even 101 long deltas (101 long shares in this case) we now have 1 long delta that’s not capped by the short call. We can have 150 long shares against 1 short call. 300 long shares against 2 short calls, etc.


This ensures we have unlimited profit potential.


The general approach I consider:

-The more short calls we sell, the more premium we collect up front - which decreases our capital gains potential.

-The fewer short calls we sell, the less premium we collect up front but we have greater cap gains potential.

-The further OTM our calls, the greater our capital gains potential with lower credit received up front.

-the further ATM our calls, the greater premium we collect up front with lower cap gains potential.

*Nothing says you can’t sell short calls at various strikes - a common approach I use. Aka if we have 5,000 shares, we can sell 10 short calls at a .40 delta, 10 more at a 0.30 delta, and 10 more at a 0.20 delta. Tons of combos available.


Don’t feel boxed in by traditional structures. Tinker with different deltas, lot sizes, expirations, etc. to find your desired risk profile.

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