Supercharge Portfolio Returns with Covered Call Campaigns

We discuss this subject more in this week-s Deribit Live, you can check out the video on on Youtube channel, or in the video below. 

When discussing option trading strategies, covered call campaigns are widely used by every type of market participant due to their ability to enhance returns by generating consistent income and mitigating some level of downside risk.

What is a Covered Call Campaign?

A covered call campaign is really just a fancy way of describing the process of continually writing (selling) covered calls over a period of time, usually adhering to a defined set of parameters while doing so.

Despite a covered call campaign strategy being ideally suited to a neutral to a mildly bullish outlook on the underlying asset, it’s still widely used by investors who plan on holding the underlying asset long term, regardless of its price movements.  

To learn covered call basics, check out this article, but for those who are unfamiliar, a covered call is when a trader or investor owns an underlying asset such as a stock, cryptocurrency, etc., and simultaneously sells call options against the asset.

This combination creates a covered position (as long as the number of options does not exceed the number of the underlying asset, i.e. if an investor had 100 shares of stock, a covered call would be the sale of 1 option contract because each option contract represents 100 shares of stock), as the trader “covers’ the call options they sell with the ownership of the underlying stock.

The main objectives of a covered call campaign are:

• Generating income from the premiums received by selling the call options while still potentially profiting from some amount of price appreciation in the underlying asset

• Lowering the overall cost basis of the underlying asset, which provides some amount of downside protection.

When we conduct a covered call campaign, we’ll normally do so with a set of parameters regarding time frame, strike price, delta, and rules on the management of the trade, etc., in order to create a framework for generating consistent income.

For example, in a previous article, we demonstrated our research results of selling a 0.40 delta call on ETH or BTC each week.  The parameters for this test were to sell the call at .40 delta (or as close to it as possible), and let the option go to expiry each week (not managing the trade at all), then immediately sell the next weekly 0.40 delta call.

To be clear, in the trading world, it’s much more common for traders to sell a monthly or even a 60 DTE (days to expiry) covered call as part of a campaign vs. our weekly test.

It’s also important to recognize that each asset type, its volatility, a trader's risk tolerance, goals, etc., will influence the decision as to what specific parameters to use as part of a covered call campaign.

Components of the Covered Call Campaign

1. Choose the Underlying Asset:

Select the underlying asset that you are comfortable owning for a longer time period. Ideally, you would have a neutral to slightly bullish outlook on the asset.

2. Purchase the Underlying Asset: 

Buy a sufficient number of shares, cryptocurrency, LEAP, or long-dated call (if doing a synthetic covered call campaign) to form a “covered” position. This means that you own the underlying asset being used in the strategy.

3. Select the Call Option:

Identify a call option that you will sell against your owned underlying asset. The call option’s strike price and expiration date are key considerations. The strike price is normally above the current market price of the underlying asset, and the expiry date should not be dated too far in the future in order to maximize time decay, as well as be within the bounds of your expectations for underlying price appreciation. 

4. Sell the Call Option:

Execute the trade by selling the chosen call option. This generates income in the form of the premium received from the buyer of the call option. 

5. Monitor and Manage:

As the option’s expiration date approaches, monitor the performance of the underlying asset and the call option.  Some covered call strategies will have parameters that call for the management of the call option by a specified time before expiry, when the options delta reaches a specific value, etc. or simply let the option expire each month regardless of the value of the underlying asset.
When talking about managing the covered call, we’re referring specifically to the act of “rolling’ it to a later expiration date and/or strike price.

Covered Call Campaign Conclusion

Selling covered calls has many benefits and is one of the most popular trading strategies used by small retail traders, right through to institutional trading firms. When executing this strategy consecutively over time as a campaign, it can greatly enhance returns vs. solely owning an underlying asset.

However, like any investment strategy, the covered call campaign comes with its own set of considerations and risks. It’s important to understand the strategy along with the underlying asset, select appropriate call option strike prices and expiration dates, and actively manage the strategy based on market conditions.

Ultimately, the covered call campaign can be a valuable addition to a trader or investor's toolkit, providing an avenue for income generation and portfolio enhancement.