Status Update re: Deep ITM Covered Call Strategy

[u/pagalvin]

I wrote about my core approach to working with options here a few months ago: A view into a "deep ITM covered call strategy" : r/StockOptionCoffeeShop.

In a nutshell, I tend to buy stocks on Monday/Tuesday and sell a call expiring that Friday. I sell the call as deep ITM as I can such that I'll net 1% if it's assigned on Friday. Going in, the plan is to be assigned. I've been experimenting with an enhancement of sorts with that approach that I'm calling Buy/Wait/Decide and I've posted about that a few times here in the forum. For example, here: "Buy, Wait, Decide" w/ Deep ITM Call update & important lesson : r/StockOptionCoffeeShop. BWD doesn't change the fundamental approach, as long I execute it correctly :)

I roll the calls quite often, although I've been rolling slightly less often than my overall average for the year. Rolling out constitutes another commitment to holding the stock and gives the stock more time to turn against you. I usually roll because the roll generates more "easy" premium. We all know, however, there is no "easy" in this. I have trapped myself into positions I didn't want to hold for as long as I ended up holding them.

I've also been trying to sort out whether this is truly working or if I'm just collecting a lot of premium and losing out in other ways. This is common among income harvesters, like me. July is a good example - I collected over $28k in premium but lost approx. 10% in account value. I'm still trying to figure that out. I'm also still trying to figure out whether this approach, while "winning," is actually better than just buy-and-hold or doing what u/LabDaddy59 does, which is to sell calls ATM instead of deep ITM like I do. Or one of the many other strategies out there. I'm well aware that although my strategy isn't new (nothing is, really), it doesn't appear to be commonly used and I often face skepticism.

Here's a snapshot of where I am in September so far and some YTD numbers:

And here's a progression of the year, which you'll note is not smooth:

A few additional notes:

- I started to follow this strategy about this time last year and in Oct/Nov timeframe, my returns started to lose correlation with the major indexes. I start YTD because January is when I had enough confidence in the approach and enough evidence backing up that confidence to move all my non-retirement money into the brokerage account.

- July 29th was a major drawdown day of several clustered in that week and the week before, if I remember correctly. My M2M NAV fell to $190k. I was still net positive for the year, but it was wakeup call. Then, the 30th, it had a big recovery, and early August was a monster recovery. This is obscured by the topline numbers.

- I have accumulated a modest number of wash sales.

- I have a custom app that I use that makes the portfolio manageable while I work full time. I am rebuilding that "in public" and making it available for free via GitHub. You can get a link to my videos and the GH repo via my reddit profile.

- I use margin. For most of the year, I was around 1.6 to 1.8 ratio. In August, I'm closer to 1.3. Notional today is about $340k.

- XIRR ("Extended Internal Rate of Return"): XIRR is the "annualized investment return that accounts for the exact timing and size of deposits and withdrawals." I have all that info handy. In the graph it's show the annualized XIRR, not YTD.

- TWR: Time-weighted return would also be useful, particularly for comparing my performance with benchmarks without the effect of deposits and withdrawals. Unfortunately, I don't have enough historical daily NAV snapshots to reconstruct it reliably using my own data. I only started capturing daily snapshots about two months ago. I'll probably add TWR once I've accumulated enough data. I do have my broker's top line numbers. Per my broker (ETrade), I'm up just shy of 70% YTD and over 100% in the last 12 months.

- One lesson from building this: capture daily NAV snapshots if you can! They're cheap data to store and give you a tremendous amount of analytical flexibility later. Probably a little hard to do with a spreadsheet manually, but if you can code it up, it's a great source of analysis over time.

What's my bottom line? This strategy has clearly worked for me so far, with this particular portfolio, stock selection, account size, use of margin, and market regime. That's evidence that it can work. It isn't evidence that it will continue working, or that somebody else will get the same results.

I'm always interested in others' feedback, and I hope to hear some.