Short-Term Capital Extraction (CE) Rule

This page defines a repeatable, mechanical entry rule for short-duration Capital Extraction covered calls. The goal is consistent, contract-driven profit with fast rotation — not maximum upside.

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Rule Summary (Short-Term CE)

Entry is allowed only if ALL conditions pass:
  • Net annualized return > 15% (net of margin interest)
  • Strike selection: ~Δ 0.70 deep ITM call Rationale: higher probability of ITM finish → faster resolution → monthly rotation.
  • Valuation: stock must trade below fair value
  • Price location: stock should be near a 52-week low Ideal: within 5% of the 52-week low; acceptable up to 10% in strong-quality names.

How Net Return is Measured

For short-term CE, the reliable “profit engine” is the option’s time value (profit component) captured at entry, minus margin interest on locked capital.

Locked Capital (After Extraction) (Cost Basis − Premium) × Shares
Intrinsic at Entry max(0, Stock Price − Strike)
Profit Component (Time Value) max(0, Premium − Intrinsic)
Interest Cost Locked Capital × Margin Rate × (Days/365)
Net Profit (Proxy) (Profit Component × Shares) − Interest
Net Annualized % (Exact Days) (Net Profit / Locked Capital) × (365/Days)
Important: This is intentionally conservative and “rotation-first.” You’re paid for time via profit component. If a trade can’t clear the net yield gate, you skip it — capital should not sit idle at breakeven.

Quick Demo Check

SymbolGDDY
Shares100
Stock Price$118.52
Cost Basis$118.52
Strike (Δ≈0.70 target)$115.00
Premium / Share$6.20
Days30
Margin Rate8.00%
Fair Value$140.00
52-Week Low$110.00

Demo Output (With vs Without Margin)

Metric With Margin (8.00%) No Margin (0.00%)
Locked Capital (After Extraction) $11,232.00 $11,232.00
Intrinsic at Entry (per share) $3.52 $3.52
Profit Component (per share) $2.68 $2.68
Profit Component (total) $268.00 $268.00
Interest Cost - $73.85 - $0.00
Net Profit (proxy) $194.15 $268.00
Net Annualized Return 21.03% 29.03%

Yield Gate

With Margin: ✅ PASS
No Margin: ✅ PASS
Target > 15% net annualized

Below Fair Value

✅ YES
Price $118.52 vs FV $140.00

Near 52W Low

⚠️ OK
Low $110.00 (ideal ≤ 5% above)

Strike Rule

Δ≈0.70
Deep ITM for monthly rotation
Pass condition: if the yield gate + valuation + 52W low filters are satisfied, execute a deep ITM call near Δ 0.70 and rotate monthly.
Yield gate is evaluated using the With Margin result by default (more conservative).

Execution Notes (Short-Term Rotation)

ItemGuideline
Contract Duration Target ~20–45 days. Close/roll monthly when net annualized stays > 15% and setup still meets valuation filters.
Profit Expectation Each contract must be “worth it.” If expected net profit is too small (or yield gate fails), do not force a trade.
Why Deep ITM Higher probability of ITM finish supports capital rotation. You are choosing repeatability over upside.
Valuation Anchor Below fair value + near 52W low makes assignment risk acceptable: you’re willing to own the business at these levels.

Disclaimer: Educational illustration only; not investment advice. Options involve risk. Manage early assignment and liquidity prudently.

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