Lesson 23: Selling covered call strategy: using the sickle of time value to collect rent regularly

1. The underlying logic of the covered call strategy

The core of the covered call strategy is to upgrade investors from "stockholders" to "rent collectors".

When you hold Tesla stock or Bitcoin spot, by selling out-of-the-money call options, it is equivalent to "putting up rental ads" for the assets - the market pays a premium to purchase the right to future possible increases in earnings.

This is exactly what Duan Yongping did with Nvidia: while holding the stock at $116.7, he sold a $120 out-of-the-money call option, which not only left room for the stock price to rise to $120, but also allowed him to collect additional premiums.

The essence of this strategy is to sacrifice part of the upward returns in exchange for certain cash flow, which is equivalent to paying yourself a "salary" during the period of stock price volatility.

But covered call strategy is not a magic weapon for easy profit. On the eve of the launch of Tesla's Optimus robot, a large number of retail investors sold $300 weekly call options. As a result, Musk suddenly announced the mass production of humanoid robots, and the stock price soared 15% in a single day. After the options were exercised, they missed out on excess returns.

2. Key points for practical operation of U.S. stocks and Bitcoin

Strike price selection in the US stock scenario :

Mild undervaluation is the golden section point.

Taking Nvidia's current share price of $250 as an example, selling a $260 monthly call option will give a premium of about 3%-5% of the share price. This position allows the premium to cover the monthly fluctuation of 2%-3%, while retaining a 5% upside potential for the share price.

If you choose a deeply out-of-the-money $280 contract, the premium may be less than 1%, but once the stock price breaks through the pressure level, the missed potential profit will far exceed the premium income.

Volatility Arbitrage in Bitcoin :

When Bitcoin is trading sideways at $70,000, selling a $75,000 weekly call option would give you a premium of about 2.5% of the value of Bitcoin.

Due to the high volatility of the cryptocurrency market, IV (implied volatility) monitoring is required: when IV exceeds 80%, the premium is sufficient to cover price fluctuations within two weeks; but when IV is below 60%, short positions should be reduced and contract hedging should be used.

On the eve of Bitcoin halving, smart money sold $73,000 weekly call options and bought $80,000 quarterly call options, forming a "near-month harvest + far-month hedging" combination, achieving an annualized return of 45% as prices surged and then fell.

Time value extraction on expiration date :

The 20 days before the quarterly earnings report are the best operating window for US stocks.

Taking Tesla as an example, selling 5% out-of-the-money monthly call options three weeks before the release of the Q1 financial report can not only reap the IV premium driven by financial report expectations (usually an increase of 15%-20%), but also avoid the risk of volatility collapse after the financial report.

For Bitcoin, selling weekly contracts 72 hours before major events (such as the Federal Reserve’s interest rate meeting and the release of CPI data) can capture event-driven volatility premiums.

3. Institutional-level risk control: Position management from Duan Yongping to Buffett

Duan Yongping's position control rule is worth learning from: use 70% of the total position for covered call strategy, and keep the remaining 30% in cash or buy deep out-of-the-money call options.

When Tesla's stock price broke through $270 from $250, he immediately moved the strike price of the sold contract up to $290, and simultaneously bought a $300 call option to form a "covered spread." This dynamic adjustment not only locked in realized gains, but also retained upside potential.

Bitcoin players need to be wary of "black swan resonance". In January 2025, a fund simultaneously sold $72,000 in Bitcoin call options and $68,000 in put options, believing that the price would fluctuate between $69,000 and $71,000.

However, MicroStrategy's sudden increase of 20,000 bitcoins caused a surge in prices, and the exercise of call options led to the forced liquidation of spot positions.

On the other hand, another institutional player used 2% of their position to sell the near-month contract, and used 0.5% of their funds to buy quarterly call options with an exercise price of $80,000 for hedging, ultimately achieving net profits in the surge.

4. Fatal details that are overlooked

The covered call strategy is not a one-time deal. When the Bitcoin holding cost is $65,000, selling a $70,000 call option has a sufficient safety margin; but if the holding price stays at $68,000 for a long time, the strike price needs to be moved up to $72,000, otherwise the holding cost and the strike price will be too close, which will greatly reduce the effectiveness of the strategy.

The IV curve of US stock options will show a "smile curve" before the earnings report date, and the IV premium of near-month out-of-the-money contracts is significant. Before Tesla's Q1 earnings report, the IV of weekly call options with an exercise price of $270 was as high as 85%, while the IV of the next-month contract of the same price was only 65%. At this time, selling the near-month contract and buying the next-month contract can reap a 20% IV difference profit.

When Tesla's stock price breaks through the strike price, retail investors often panic and close their positions.

But professional players will go with the flow - use the cash obtained from exercising the option to immediately sell put options with the same strike price, forming a "rolling covered call."

5. Next Issue Preview

Tomorrow we will continue to discuss "Protective Put"

Homework

1. Cost calculation experiment : Choose any U.S. stock (such as Nvidia), calculate the premium income of the strike price at ±5% of the current stock price, and compare the annualized rate of return of different strike price strategies;

2. Volatility difference scan : When the Bitcoin price breaks through $85,000, record the IV difference between the $90,000 call option of the current week and the next week, and analyze its correlation with the price fluctuation range;

3. Dynamic adjustment deduction : Assuming that you hold 100 bitcoins (costing $70,000), when the price rises to $78,000, design a plan to move up the exercise price and calculate the premium coverage ratio.