Find 2%–3% ROO the Smart Way
Find 2%–3% ROO the Smart Way (Without Chasing Junk Premiums)
Goal: a repeatable, risk-aware process to target 2%–3% monthly ROO on covered calls—using quality filters so you’re not tempted by sketchy, illiquid tickers or event-risk landmines.
Key Terms (Fast)
- ROO %: Premium ÷ stock price for this expiry window (not annualized). Use with delta & OI to balance assignment risk vs. income.
- Adjusted ROO %: ROO plus intrinsic cushion if you sell slightly ITM (accounts for strike − spot + premium).
- Delta: Rough probability of finishing ITM. Lower delta → lower assignment, lower premium; higher delta → higher premium, higher assignment.
- Open Interest (OI): Liquidity proxy. Higher OI lowers slippage risk.
- Sentiment: Short-term news tone (−1 to +1) to highlight narrative tailwinds/risks.
- Earnings Window: We avoid earnings within ~30 days pre-expiry to cut gap risk.
The 5-Step Framework
- Start with quality & liquidity. Filter for large/mega caps or consistent option chains. Require OI ≥ 100 at your target strike/expiry.
- Target ROO 2%–3%. Set ROO min/max to fence out “too good to be true” junk and underpaying blue-chips.
- Pick a sensible delta band. For income without constant assignments, start around Δ ≈ 0.20–0.35. Tighten or loosen by risk tolerance.
- Exclude earnings landmines. Toggle “No earnings ≤ 30 days before expiry.” The ROO hit is usually worth the gap-risk reduction.
- Check spread & sentiment. Prefer tighter spreads; if spread is wide, consider using the mid and confirm Sentiment ≥ 0 to avoid negative news drags.
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Example Filter Set (Why Each Helps)
- ROO 2–3% Targets a sweet spot where many liquid names live; avoids the tail-risk of “8% per month” traps.
- Δ 0.20–0.35 Keeps assignment odds manageable while maintaining premium. Raise or lower for your risk/goal.
- OI ≥ 100 Reduces slippage risk; combine with daily volume checks for even better fills.
- Exclude earnings ≤30d Cuts downside gap risk; if you must hold through, size smaller and plan rolls.
- Sentiment ≥ 0 Avoids recent negative news drag; neutral/positive tone tends to support price.
- Tight spread Prefer spreads ≤ 5–10% of premium; if wider, negotiate mid and verify depth across levels.
ITM vs. OTM for This Target
- Slight OTM often lands neatly in the 2–3% band with moderate Δ; good for steady income and lower assignment frequency.
- Slight ITM can lift Adjusted ROO via intrinsic cushion, trading more assignment risk for extra safety on pullbacks.
Rolling Plan (Keep It Boring)
- Pre-decide roll triggers (e.g., buy-to-close at 65–75% max profit or delta rises above 0.45).
- If assigned, flip to cash-secured puts at your comfort Δ to re-enter on your terms.
⚠️ Informational only; not investment advice. Options involve risk. Use at your own discretion.
