Why Selling In-The-Money Covered Calls Is A Great Strategy


After having published the article about playing defense with covered option selling strategies, it's time to take a look at an example showing the true power of in-the-money covered call writing. Does it generate consistently positive returns? What kind of market environment are we looking for to put these trades on and more specifically: when do we reach our maximum profit potential? Based on 9.5 years of historical data on American Tower (AMT), which is one of the long-term elite performers, we can take a look at the performance of different 1-year in-the-money covered calls and their respective standard deviation. American Tower typically sees 17% historical and thus realized volatility, whereas longer-term call options have been pricing 21% (on average) over the past decade. Just pull up a price chart on AMT and you'll see the consistency many shareholders have enjoyed so far. We believe that AMT is a good investment for defensive long-term focused investors, but with covered options strategies it's an even better play.

Empirical Research

Is there an edge of selling in-the-money covered calls into high implied volatility? Or do we get a fairly consistent picture across board (thus in every IV environment)?

This empirical research piece breaks down the data from June 2010 to June 2019. We've analyzed the forward and realized 1-year returns for both 1-year in-the-money covered calls and buying stock (excluding dividends), i.e. the return from June 2010 to June 2011; from July 2010 to July 2011 and so on. Basically, more than 110 months of reference points were plotted. Also, we looked at 30 different months with an either normal or high volatility and tracked the performance of in-the-money covered calls throughout the year on a monthly basis.

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The Results For A 5% ITM Covered Call (1 Year Duration)

Buy-and-hold performance

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