The covered call, in its traditional, standard format, is difficult to improve upon due to the fact that it is so effective in its current form. But, given the fact that we are in a period of extremely low volatility, and we’re all looking for something to do, we offer up an innovative way to juice up the plain vanilla covered call.
A juicy covered call involves a current long stock position plus a call ratio. In other words, you add a long call (usually ATM or slightly OTM) and two short calls (usually around the 30 or 35 delta) to your long stock position. Another way to think of this position is as a standard covered call plus a long call spread. What we find is that this strategy outperforms a standard covered call if we are correct in our bullish assumption, and the underlying rises up, or beyond, our short strike. The standard covered call is the more effective strategy if we are not directionally right, and the underlying moves lower or goes nowhere.
In conclusion, the standard covered call is the more conservative strategy that continues to show impressive results. However, the juicy covered call offers you an opportunity to generate a higher P/L if you have a convicted bullish assumption, and you are correct.
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