0. Fair Value First — The Non-Negotiable Rule
The entire framework is controlled by one anchor: Conservative Fair Value (FV).
Premium, IV, and “activity” are not decision drivers. FV decides duration, delta, and
whether we use Capital Extraction, CSPs, or a short rotation contract.
Decision map (simple):
- Price ≫ FV: use longer CE (often 1–2 years) and prioritize maximum downside protection over Day-1 yield.
- Price ≈ FV (±5–10%): use short CE (30–90 days, e.g., Δ≈0.60–0.75) to target rotation and annualized yield.
- Price < FV: avoid capping upside unnecessarily; prefer CSPs or organic premium with strikes at/below FV.
Guardrail: If you can’t justify the trade using FV, you skip it — regardless of premium.
This prevents the engine from drifting into “premium chasing,” especially when margin is available.
FV is not about precision — it is about discipline. A conservative FV estimate and consistent rules
outperform a perfect estimate that you ignore.
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.
1-A. One Live Example — AVGO (100 Shares)
Before definitions and rules, here is a complete live-style example showing the framework mechanics:
fair-value anchored strike, day-one float, locked capital, and downside protection.
| Metric |
Value |
| Purchase date |
Jan 1, 2026 |
| Contract expiration |
Jan 1, 2028 (24 months) |
| Shares |
100 |
| Cost (per share) / Purchase price |
398.74 |
| Conservative Fair Value (per share) |
230.00 |
| Deep ITM Covered Call Strike (near FV) — Exp Jan 2028 |
230.00 |
| Premium Received (Float released Day 1) — per share |
207.00 |
| Total Float Released Day 1 (Premium × Shares) |
$20,700 |
| $20,700 Float Reinvestment Gain @ 12%/yr for 24 months |
$5,266 (20,700 × (1.12² − 1)) |
| Real Cost After Extraction (Cost 398.74 − Premium 207.00) — per share |
191.74 |
| Locked Capital (economic risk) — per share |
191.74 |
| Locked Capital Total (Locked Capital × Shares) |
$19,174 |
|
Downside Protection Advantage (Original Cost → Locked Capital)
398.74 → 191.74 per share (reduction of 207.00 per share)
|
$207.00/share
($20,700 total)
|
| Effective Sale Price at Expiration (Strike 230.00 + Premium 207.00) — per share |
437.00 |
| Day-1 Profit (230.00 + 207.00 − 398.74) — per share |
38.26 |
| Day-1 Profit Total (38.26 × 100 Shares) |
$3,826 |
| Day-1 Profit $3826 Reinvestment Gain @ 12%/yr for 24 months |
$973 (3,826 × (1.12² − 1))
|
|
**Total Parallel Gains (Day-1 Profit + Float Gain (12%) + Day-1 Profit Gain (12%))
|
$10,065 (3,826 + 5,266 + 973)
|
| Day-1 Profit % (vs Locked Capital) |
38.26 ÷ 191.74 = 19.95% (over 24 months) |
| Day-1 Profit CAGR (annualized) |
19.95% over 24 months ≈ 9.52% per year |
|
**Total Gain vs Locked Capital (Total Gain ÷ Locked Capital) + CAGR
|
10,065 ÷ 19,174 = 52.50%
CAGR: (1 + 0.5250)1/2 − 1 = 23.49%/yr
|
Day-1 Profit = Strike + Premium − Cost |
Locked Capital = Cost − Premium |
Profit % = Day-1 Profit ÷ Locked Capital
Interpretation (with real numbers):
By selling the deep ITM call, this AVGO example releases
$207.00/share
(
$20,700 on 100 shares) as
Day-1 float. That lowers the economic capital at risk to
$191.74/share ($398.74 − $207 = $191.74)
(
$19,174 locked capital total), creating about
$198.74/share (
$19,874) of downside buffer versus the original purchase price.
In exchange for capping upside, the setup locks in a
Day-1 profit of $38.26/share ($230 + $207 − $398.74)
(
$3,826 total), which is
19.95% relative to locked capital for the contract expiring Jan 2028.
Blended economic return vs locked capital (including reinvestment gains):
Measuring performance against the locked capital base (
$19,174), total gain dollars include:
(1) the
Day-1 profit earned immediately,
(2) the
gain generated by reinvesting the released float (
$20,700) at a conservative
12% annual return for 24 months, and
(3) the
gain generated by reinvesting the Day-1 profit (
$3,826) at the same rate.
- Day-1 profit: $3,826
- Float reinvestment gain: $20,700 × (1.12² − 1) = $5,266
- Day-1 profit reinvestment gain: $3,826 × (1.12² − 1) = $973
Total gain dollars: $10,065
Total return vs locked capital: $10,065 ÷ $19,174 =
52.50% over 24 months
Effective CAGR: (1 + 0.5250)
1/2 − 1 ≈
23.49% per year
Additional risk advantage: the structure reduces economic exposure from the original
$398.74/share purchase price down to $191.74/share of locked capital on Day 1.
This ~52% reduction in effective downside exposure is independent of market direction
and is not reflected in CAGR metrics.
The blended CAGR shown above is an economic return view that incorporates reinvestment
of released float and Day-1 profit. The 12% reinvestment rate is an assumption used to illustrate
the framework’s parallel compounding effect and is intentionally reported separately from the
headline locked-capital CAGR.
2. Core Concepts & Definitions
Fair Value (FV)
Your conservative estimate of intrinsic value per share. Every extraction and CSP decision must reference this anchor.
Framework rule:
Fair Value determines the contract type and duration.
Long CE is for extreme overvaluation. Short CE is for near-FV rotation.
CSPs are for below-FV acquisition.
Capital Extraction Project
A long-dated, deep ITM covered-call campaign on a stock you already own, typically 2+ years to expiry.
Locked Capital
The economic risk remaining after extraction:
Locked Capital per Share = Cost Basis − Net Premium Kept
Day-1 Profit (Extraction Yield)
Profit realized economically at the moment you open the capital extraction project,
measured vs locked capital over the contract horizon.
Reusable Float
The cash released by capital extraction (premium + prepaid proceeds) that is now
available for new trades while a smaller locked-capital stub remains in the original position.
Return Measurement Standard
We report two return lenses to avoid confusion:
Primary (Economic): ROI = Profit ÷ Locked Capital
Secondary (Conservative): ROI = Profit ÷ Broker Collateral / Original Cost
The economic view is framework-consistent because premium is received on Day-1 and immediately reduces capital at risk.
The conservative view is included for comparability with traditional yields and broker collateral conventions.
Cash-Secured Put (CSP) Yield
Annualized yield based on premium received vs strike, with strike at or below fair value:
Approx. Annualized CSP Yield ≈ Premium ÷ (Strike × Term in Years)
Locked Capital vs Broker Collateral (Why ROI can look higher):
Option premium is credited upfront. In this framework, that cash is treated as recovered and no longer at risk,
so returns are measured primarily against locked capital (economic exposure after extraction).
For transparency, we also show a conservative comparison based on broker collateral / original cost,
which treats the full capital as continuously locked. Both are valid — they answer different questions:
economic efficiency vs collateral-based comparability.
Key idea: we stop thinking in terms of “I own 100 shares at $X” and instead
track locked capital and float. Price volatility becomes raw material
for generating cash flow instead of a source of anxiety.
3. Capital Recycling — Why Liquidity Beats Paper Returns
Buy-and-hold deploys capital once: a dollar is committed to a stock and stays locked until exit.
Even if the position shows a “15% annual return,” that gain is often
unrealized until sold and reversible — it can evaporate quickly during a drawdown.
The Capital Extraction Framework is designed to convert a portion of exposure into
real cash on day one (float), while the remaining position is engineered
toward fair value.
This matters most in down cycles: extracted cash does not vanish with the stock price,
and it can be held, redeployed, or preserved as dry powder without liquidating
the original position.
A second advantage is outcome diversification. Buy-and-hold concentrates 100% of capital into a single company’s
future price path — if that business underperforms or de-rates, returns suffer materially.
Capital Extraction reduces that dependency by converting part of the position into cash upfront and allowing the
released float to be redeployed across multiple projects. In many setups, a portion of the 2-year outcome is
effectively pre-realized via premium and prepaid proceeds (often translating to roughly 8–11% annualized
on locked capital, illustrative), while recycled float can be spread across additional value-aligned opportunities.
Pre-Realized Profit vs. Market-Dependent Profit
In a typical capital extraction project, a meaningful portion of the expected
2-year economic return (often ~16–20% total over the contract horizon, typically ~2 years, implying roughly 8–10% annualized on locked capital)
is pre-realized on Day 1 in the form of option premium and prepaid sale proceeds.
While this caps upside participation, it converts a future, uncertain gain into
immediate cash.
By contrast, buy-and-hold strategies leave the same profit entirely dependent on
future market prices. Until the position is sold, the gain remains unrealized and
fully exposed to drawdowns.
Key idea: this is not leverage and not speculation.
It is a liquidity-first structure: a portion of the position is converted into
deployable cash early.
Capital recycling is an optional advantage — it helps only when float is redeployed
prudently and structural costs (roll losses, spreads, taxes, missed upside)
are kept controlled.
A Simple $100,000 Illustration (Conservative, Risk-First)
Initial capital
$100,000.00
Day-1 float released
35% (≈ $35,000.00)
Locked capital remaining
≈ $65,000.00 (engineered toward fair value)
Redeploy target
16.0% annualized
(illustrative, not guaranteed)
Horizon
3 years
Capital “turns” of the same float
3× (illustrative reuse potential)
What “recycling” means in practice:
-
The float ($35,000.00) is real cash received upfront.
Unlike paper gains, it does not disappear in a drawdown and can be held or
redeployed without selling the original position.
-
Over a multi-year horizon, the same float may be redeployed across multiple projects.
As a simple illustration, 3 turns implies roughly
$105,000.00 of cumulative “productive deployments” —
a measure of capital usage, not a promise of additional profit.
-
Income lens (illustrative): at
16.0% annualized,
$35,000.00 may aim to generate about
$5,600.00/year,
or $16,800.00 over
3 years (linear illustration).
Boundaries (important): capital recycling is not a guaranteed advantage.
It improves outcomes only when the released float is redeployed prudently and consistently,
and when option structure costs (roll losses, spreads, taxes, missed upside)
are kept controlled.
Bottom line: Buy-and-hold asks the market for a future payoff.
Capital Extraction deliberately caps upside to get paid earlier,
reduce effective capital at risk, and preserve deployable cash that survives drawdowns.
3-A. Engine Construction — Core Pillars + Recycling Layer
The Capital Extraction Framework is built on two core pillars, and can optionally include a
third operational layer for rotation and premium recycling. This is not a new framework —
it is a practical implementation detail for keeping the engine active while long-dated positions mature.
Two Core Pillars (Slow, Protected)
- Capital Extraction (CE) — long-dated deep ITM covered calls on overvalued quality stocks, engineered for downside protection and day-1 float.
- Long-dated Cash-Secured Puts (CSP) — written on undervalued names (strike ≤ conservative fair value), targeting contractual income and welcomed assignment.
Optional Recycling Layer (Fast Rotation)
- Monthly / Quarterly Wheel — a rotation bucket used to keep earning and compounding while the two core pillars work over longer horizons.
Policy: once the Capital Extraction bucket is “fully funded,” new money generated from monthly/quarterly calls
is typically recycled back into the wheel bucket (new monthly/quarterly positions), while the two core buckets
(CE and long-dated CSPs) are allowed to show their effect over time.
Allocation (Percent)
Capital Extraction (CE)
47.9%
Long-dated CSPs
19.8%
Monthly/Quarterly Wheel
32.4%
Important clarification: the organic capital bucket represents the active
monthly/quarterly rotation base and does not include capital reserved for long-dated
cash-secured puts. As a result, the engine is intentionally balanced between
Capital Extraction on one side, and a combined
income + rotation side composed of long-dated CSP capital plus organic capital.
This creates a roughly even split between protected long-duration extraction and
ongoing contractual income with active premium rotation.
Why this 3-part layout works:
- CE prioritizes downside protection on overvaluation and converts uncertain future gains into day-1 cash flow.
- Long-dated CSPs create contractual yield at fair-value-aligned strikes and build discounted ownership inventory.
- Wheel keeps the engine rotating and compounding without forcing constant changes to the long-dated buckets.
Note: allocation is a portfolio choice, not a rule. Percentages can vary by investor objectives, tax situation,
and market conditions.
3-B. 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.
Blended engine: in practice this produces roughly ~16% visible annual return plus
additional “invisible” benefit from avoided crashes, buying below fair value, and consistent float redeployment.
Over decades, economic compounding can approach the 18–20% range while keeping tail risk controlled.
Invisible Compounding Principle:
The Capital Extraction Engine is designed to preserve capital first, not chase maximum upside.
If a position can deliver a 16–20% targeted annual return with a wide loss buffer (via lower locked capital and a fair-value anchor),
we are willing to give up occasional 50%+ appreciation. The biggest compounding edge is often what you avoid:
large drawdowns, long recovery periods, and capital that stays trapped. Preserving loss is the engine’s
most important form of “invisible compounding.”
Rule Update — Phasing Out Margin CSPs:
Going forward, the engine is designed to run on cash, not margin.
While existing cash-secured puts may still be open on margin buying power during the transition,
no new CSP exposure will be added using margin capacity. The objective is simple:
avoid forced decisions in drawdowns and protect the engine’s long-run compounding.
Down-Cycle Deleveraging (Buyback Rule):
During market stress, the engine may buy back unassigned puts to reduce obligation and rebuild cash reserves.
This is not a “panic exit” — it is a mechanical risk-control step to keep the portfolio deployable and prevent
margin mechanics from forcing liquidation at the worst time. The goal is to gradually convert all CSP exposure into
fully cash-secured positions.
Cash-Only Engine Steady-State:
- Highly overvalued, high-PE quality stocks: use deep ITM capital extraction to prioritize downside protection and day-1 float.
- Fair-value / mildly undervalued stocks: capital extraction is allowed only when post-extraction locked capital lands inside a 15–20% margin-of-safety band and return gates are met.
- Significantly undervalued stocks: use cash-secured puts (cash-only) at or below conservative fair value, where assignment is welcome.
4-A. Multi-Cycle Capital Extraction — A Long-Horizon Engine
For the Capital Extraction Framework to succeed over the long term, only two conditions
truly matter. First, the company must have a reasonably estimable fair value, grounded
in real earnings power rather than speculation. Second, the company must have a
high probability of existing and remaining relevant for decades, allowing the engine
to benefit from repeated valuation cycles.
Stocks that lack durable business models, depend on constant capital infusion, or face
meaningful risk of permanent impairment do not lend themselves to capital extraction.
Without a stable fair-value anchor or long-term survivability, the multi-cycle advantage
disappears, and downside protection becomes illusory rather than structural.
Capital Extraction should not be evaluated as a single option contract.
It is a multi-year, multi-cycle capital management engine designed to
exploit valuation extremes over time while preserving downside protection.
In highly overvalued and heavily traded stocks, the option market may not always
offer strikes close to conservative fair value. In such cases, the framework
allows selecting the lowest available deep ITM strike — even if the
initial Day-1 profit appears modest and falls below typical single-cycle targets.
Important: A low Day-1 profit in an early cycle does not imply a poor outcome.
The objective in these situations is to anchor economic risk near fair value,
release float, and survive the overvaluation phase — not to maximize yield immediately.
Over time, valuation regimes change. When the stock eventually reverses toward
fair value — often after one or two extraction cycles — the engine gains
powerful optionality:
-
If the stock trades below or near fair value, the position can be
closed at minimal cost, returning shares at an attractive adjusted basis.
-
A new extraction or covered call can then be initiated at a
higher relative strike (e.g., 30–40% above fair value) using
shorter-dated contracts, dramatically improving yield.
-
This later-cycle monetization often generates a disproportionate share
of total lifetime returns, even if early cycles were conservative.
Key Insight: Capital Extraction is designed to compound advantages across
cycles. Early cycles prioritize survivability and cost control;
later cycles monetize mean reversion and volatility normalization.
This multi-cycle design is why the framework emphasizes
fair-value anchoring, downside protection, and float reuse
over maximizing yield in any single contract.
5. Cash-Secured Puts — Value & Income Leg
On the value side, we run cash-secured puts only on undervalued names with strong fundamentals.
- Confirm fair value (FV) is at or above strike.
-
Compute approximate annualized CSP yield:
Annualized CSP Yield ≈ Premium ÷ (Strike × Term in Years)
-
Only sell CSPs where:
- Annualized yield ≥ 20%, and
- You are genuinely happy to own the stock at strike for years if assigned.
-
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.
-
If CSPs expire worthless:
- You keep the premium as pure income,
- Capital recycles into new CSPs or extraction projects.
Decision Gate (Undervalued Stocks):
For undervalued or fair-value stocks, we attempt “minimum extraction” only if the setup meets our
Day-1 profit gate (typically 16–20% annualized on locked capital). If the option market does not offer
enough time value to reach that target, we do cash-secured puts instead — because CSPs preserve upside participation
while still generating contractual income at a strike below conservative fair value.
Updated risk rule: new CSPs are fully cash-secured; no new CSPs are written off margin.
Margin buying power is treated as buffer, not as a way to create additional put obligations.
Engine Priority Rule:
The Capital Extraction Engine prioritizes downside protection over chasing a hefty high-price / high-profit upside.
If a structure can deliver a 16–20% targeted annual return while preserving a wide break-even cushion and a realistic
“success threshold,” the framework is willing to give up occasional upside spikes in exchange for
consistency, survivability, and repeatability.
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.
Mid-Cycle Exit Advantage (MSFT Example)
A practical advantage of deep in-the-money capital extraction is the ability to unwind a position
mid-cycle during a drawdown with minimal economic loss. Unlike buy-and-hold, where downside is fully
realized unless the stock recovers, the option leg can retain value that offsets stock depreciation,
creating an operational “exit buffer.”
MSFT mid-cycle close:
Original Cost$522.74
Exit Price$485.63
Stock Loss−$37.11 / share
Premium Received+$175.00
Premium Paid (Close)−$141.04
Net Option Gain+$33.96 / share
Net Result−$3.15 / share (near-flat)
Interpretation: the option leg absorbed most of the drawdown, allowing the position to be closed to reduce
margin pressure or redeploy capital without waiting for a full recovery. This embedded flexibility is a core
reason the framework prioritizes Day-1 premium, deep ITM positioning, and disciplined
valuation anchoring.
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.
Invisible compounding: simple CAGR doesn’t show the benefit of avoiding big 30–50% drawdowns,
getting paid to enter below fair value, and recycling float. Economically, those protections can add
several percentage points to long-run compounding compared with a traditional buy-and-hold approach.
6-A. Behavioral ROI — Why Consistency Beats Volatility
Traditional performance discussions focus on the average return. In practice, investors experience
returns as a sequence — and the sequence determines whether they stay invested long enough to benefit
from the “good years.”
Consider two five-year return paths:
Path A (typical equity experience):
-20%, +10%, +3%, -5%, +35%
The average may look acceptable on paper, but many investors exit during the -20% drawdown and never
participate in the recovery year.
Path B (Capital Extraction experience):
+13%, +15%, +11%, +9%, +12%
The engine is built for repeatability: fair-value anchoring, locked-capital discipline, and frequent
realized gains via premium capture, resets, and structured exits.
The framework’s downside protection provides an “invisible return” that is not captured by simple ROI:
it reduces the probability of panic exits and short-circuits the long recovery periods that destroy
compounding.
Key idea: Real-world ROI is not just what the strategy can earn — it is what the investor can
stay invested to earn.
Capital Extraction often feels closer to a high-yield cash engine than a traditional equity portfolio:
not risk-free, but designed to reduce large drawdowns and provide frequent “proof” via realized cash flow.
Note: The sequences above are illustrative examples to explain behavior and sequence risk. They are not a
performance claim or guarantee.
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.
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.
Interpretation: the real edge is not a secret formula. It is
valuation work, risk discipline, and consistency.
The goal is to help others think like capital engineers, not speculators.
9. Conclusion
The Capital Extraction Framework is a capital engineering system.
It converts high-PE, overvalued quality stocks into Day-1 cash and reusable float,
compresses effective exposure toward conservative fair value, and uses
cash-secured puts on undervalued names to pursue contractual income where ownership is welcome.
The edge is not prediction — it is structure:
- Rules and thresholds that prevent “premium chasing” (e.g., ~16% total Day-1 profit over ~2 years for CE; ≥20% annualized for CSPs),
- Fair value + survival discipline as non-negotiable entry filters, and
- Float reuse that keeps capital deployable and compounding while long-dated positions mature.
What makes this different:
Traditional investing concentrates outcomes into a single requirement — the market must rise.
This framework deliberately trades some upside participation for downside engineering,
liquidity, and a higher probability of staying invested through full cycles.
The result is a form of return not captured by simple CAGR: losses avoided, recoveries shortened,
and capital not trapped.
Over time, the goal is a repeatable engine that can deliver explainable, auditable,
and risk-first compounding — supporting both financial independence and meaningful giving.
Thesis: Convert overvaluation into upfront cash flow, anchor risk to fair value, and keep capital reusable through the entire cycle.
Disclaimer: Educational illustration only; not investment advice. Options involve risk, including the potential loss of principal.
Dividends may change and early assignment is possible. Use with valuation discipline and appropriate risk controls.
