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I spent yesterday evening doing some math with covered calls (because clearly that's the perfect Friday night activity). I've been using Excel to play with some scenarios. And in a way I like it - doing things manually lets me play around with some of the numbers to see what I'm getting.

Spreadsheets are amazing tools! Very often spreadsheet exercises have shown my intuition to be wrong. Most of my math with php is first checked with spreadsheets. I even used them to model the data flow of my current OOP php framework. They make it possible to visualize complex relationships. The most important piece of software on my very first personal computer, an Apple II, was VisiCalc, the grandaddy of spreadsheets. It was terrific for modeling the complex health insurance policies I was selling.

And what I found is, indeed: the best ROO (return on options) is from calls that are at the money or very closely in the money. Not too bad (ROO) at very slightly out of the money calls either, you get upside opportunity but no downside protection - so end of day depends how bullish/aggressive you are.

On stocks that that exhibit zero growth the best options are at-the-money. On growth stocks out-of-the-money options are better because you also capture part of the growth. On declining stocks in-the-money options would be best. But I insist this is the wrong way to pick options because growth rate is just one variable in a very complex interplay of growth, time to expiration, strike price, volatility, market sentiment, news, and what not. $ per day (similar to ROO) picks the best calls to sell.

Suppose there are two $150 stocks one of which has calls that yield $40 per day and the other has calls that yield $35, which one would you trade? The one correction I make is setting a minimum dollar amount on the premium to avoid day trading.

Another thing I found, the best ROO (whether just return on options or even including upside potential) comes from calls with expiry close. That means, weeklies are more profitable than monthlies - have you found this to be the case?


It makes sense logically (thinking about IV) but I've only looked at a few scenarios, my math isn't comprehensive. But I'm at the point where I think, if a stock doesn't have weeklies, I may as well ignore it.

Wrong! If you are a week away from expiration you have found a weekly whether the stock has weeklies or not!!! As above, find the stock that yields the highest $$$ per day. In my last run two were 8 days to expiration and the other two were 15 days to expiration. As above, time to expiration is just one variable in a very complex interplay...

Enjoy your Saturday in the Sun. Isn't it Winter in AussieLand?

Denny Schlesinger
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