Capital Extraction Framework — White Paper

1. Motivation — Why This Framework Exists

Traditional equity investing is built around a simple hope: “Buy good companies, hold them, and the price will go up.” That approach leaves investors exposed to long stretches of locked capital, valuation risk, sequence risk, and psychological pressure.

The Capital Extraction Framework reverses that dependency on market prices. Instead of waiting for the market to pay us, we:

• Use deep in-the-money (DITM) covered calls on overvalued, high-quality stocks to pull out large amounts of cash on day one.
• Treat the released cash as reusable float, redeployed into cash-secured puts and other income threads on undervalued names.
• Anchor every decision to conservative fair value and survival to expiry, not price momentum or story stocks.

The goal is a repeatable engine that can:

• Target roughly 16%+ annual economic yield,
• Provide deep downside protection on high-PE, overvalued holdings, and
• Keep capital flowing in a way that is explainable, auditable, and teachable.

2. Core Concepts & Definitions

3. Target Returns & Philosophy of Safety

The framework is built around two quantitative gates:

Gate A — Capital Extraction Projects

• Used on overvalued but high-quality stocks that you already own.
• Target: ≥ 16% total Day-1 profit over ~2 years on locked capital (≈ 8% per year).
• Allowed only when:
  • You have a clear fair value anchor, and
  • Business survival to expiry is highly likely (strong balance sheet, real cash flow).

Gate B — Cash-Secured Puts (CSPs)

• Used on undervalued names in or below your fair-value zone.
• Target: ≥ 20% annualized yield on the put obligation.
• Strike must be at or below **conservative fair value**, and you must be happy to own if assigned.

4. Capital Extraction Mechanics — Deep ITM Covered Calls

For a qualifying stock you already own:

1. Choose a long-dated expiry (often 2+ years out, e.g., Jan 2028 LEAPs).
2. Select a deep ITM strike, typically:
   • Anchored near fair value (e.g., ORCL strike at ≈ $190 when market price is much higher), or
   • Slightly above fair value if quality and survival are strong.
3. Sell the deep ITM covered call. You receive:
   • Intrinsic value — prepaid future sale proceeds, and
   • Time value — true Day-1 gain component.
4. Compute key metrics per share:
   • Cost basis
   • Net premium kept
   • Locked capital per share
   • Effective sale price (Strike + Net Premium)
   • Day-1 profit vs locked capital and implied CAGR to expiry
5. Release float: the cash received (premium + intrinsic) becomes reusable float, redeployed into CSPs and other income trades targeting ~1–3% monthly.
6. Manage the project over time:
   • If price falls toward fair value, you may buy to close early and reset with a new strike/date.
   • When a further expiry appears, use the Progressive Roll Rule (QCOM example) to roll out ~6 months and refill time value.

Detailed examples: ORCL — Fair-Value Anchored Extraction, IREN — Overpay Rescue, CRWD — Overvaluation Extraction.

5. Cash-Secured Puts — Value & Income Leg

On the value side, we run cash-secured puts only on undervalued names with strong fundamentals.

1. Confirm fair value (FV) is at or above strike.
2. Compute approximate annualized CSP yield:
   Annualized CSP Yield ≈ Premium ÷ (Strike × Term in Years)
3. Only sell CSPs where:
   • Annualized yield ≥ 20%, and
   • You are genuinely happy to own the stock at strike for years if assigned.
4. If assigned:
   • You acquire shares below fair value, and
   • You may later run capital extraction when the stock becomes overvalued again, or simply write fair-value-aligned covered calls.
5. If CSPs expire worthless:
   • You keep the premium as pure income,
   • Capital recycles into new CSPs or extraction projects.

6. Risk Management & Invisible Protection

The engine embeds several layers of risk control:

Locked Capital View

We track risk in terms of locked capital, not sticker price. If you overpay at $65 but extract enough to push economic risk near $30–35 (IREN example), your real downside is far smaller than the price chart suggests.

Fair-Value Anchor Rule

Capital extraction is allowed only if locked capital per share is at or below fair value. This is what prevented the ORCL move from ≈ $258 to ≈ $190 from ever becoming a true economic loss: the engine had already engineered your risk down near fair value.

No “Tuition Trades”

The CRWV example is treated as a deliberate tuition trade — a reminder not to extract capital from weak businesses without a clear fair value and survival confidence. From now on:

• No capital extraction where fair value cannot be reasonably estimated.
• No capital extraction where balance-sheet or survival risk is too high for a 2–3 year horizon.

Allocation Caps & CSP Discipline

• Per-name locked capital bounded to a modest share of total portfolio.
• Total high-PE extraction exposure kept as a limited slice of total capital.
• No new CSP exposure from margin; only fully cash-secured puts.

7. Real-World Case Studies (Leg Index)

The framework is grounded in live campaigns, each documented as a separate case study. Together they show how the engine behaves across dividends, overvaluation, losses, float recycling, and mistakes.

• Leg 0 — Core Philosophy  –  Core Principles — Independence from Market Irrationality
• Leg 1 — Dividend Float (WU)  –  Western Union — Dividend Float
• Leg 2 — Real Earning Extraction (AAPL)  –  Apple — Real Earnings Extraction
• Leg 3 — Overvaluation Extraction (CRWD)  –  CrowdStrike — Overvaluation Extraction
• Leg 4 — Capital Loss Reversal  –  Capital Loss Reversal — Turn Loss into Income
• Leg 5 — Float Redeployment  –  Float Redeployment — 1–3% Monthly Yield
• Leg 6 — Float Recycling  –  Float Recycling — MP → NBIS → BE
• Leg 7 — Progressive Roll Rule (QCOM)  –  QCOM — Progressive Roll Rule
• Leg 8 — Oscillating Capital Extraction (ELF)  –  ELF — Oscillating Extraction Rule
• Leg 9 — Fair-Value Anchored Extraction (ORCL)  –  Oracle — Fair-Value Anchored Extraction
• Leg 9-A — Overpay Rescue (IREN)  –  IREN — Overpay Rescue via Capital Extraction
• Leg 10 — Tuition Trade (CRWV)  –  CRWV — Tuition Trade / Fair-Value Violation

Each leg shows one “face” of the engine — from enhancing dividend yield to harvesting overvaluation, repairing errors, and recycling float across multiple projects.

8. Intended Use & Ethical View

This framework is being documented with a long-term intention: build a robust, transparent engine that can compound capital safely and ultimately be directed to philanthropy and public good.

• The method is explained openly so others can learn, adapt, and improve upon it.
• The author’s personal plan is to donate accumulated wealth, making the framework part of a broader “capital for humanity” philosophy.
• Nothing here is personalized investment advice; it is an educational description of one disciplined approach to options-based investing.