Laddering Covered Call Strikes with CMG – May 27, 2025
When we sell multiple covered call or cash-secured put contracts, we can use numerous strikes to enhance the diversification process. In this article, I will use a real-life example taken from one of my option portfolios, where I used 2 different out-of-the-money (OTM) covered call strikes. The analysis will include calculations of each strike as well as a combined average of both.
What is laddering strike prices?
This is a term I borrowed from the bond market where multiple strikes are used for calls or puts with the same contract expiration dates. Strikes can be all ITM, all OTM or a combination of the two.
Real-life example with Chipotle Mexican Grill, Inc. (Nasdaq: CMG)
- 12/16/2024: Buy 500 x CMG at 64.79
- 12/16/2024: STO 3 x 12/20/2024 $66.00 calls at $0.46
- 12/16/2024: STO 2 x 12/20/2024 $67.00 calls at $0.22
- 12/16/2024: The average strike price computes to $66.40
- 12/16/2024: The average call premium calculates to $0.36 (rounded)
CMG calculations using the BCI Trade Management Calculator (TMC)
- Pink rows ($66.00 strike): The 5-day initial time-value return is 0.71%, 51.83% annualized. There is an opportunity of an additional 1.87% profit if share price moves up to the OTM $66.00 strike
- Green rows ($67.00 strike): The 5-day initial time-value return is 0.34%, 24.79% annualized. There is an opportunity of an additional 3.41% profit if the share price moves up to the OTM $67.00 strike
- Purple rows (5 contract average): The 5-day initial time-value return is 0.56%, 41.01% annualized. There is an opportunity of an additional 2.48% profit if share price moves up to the average OTM $66.40 strike
Discussion
Laddering our option strike prices is an additional form of diversification. In the case of all OTM strikes, we have the benefit of higher initial returns with the lower strikes and greater upside potential with the deeper OTM strike. Averaged together, we have the opportunity to still generate significant initial returns, with huge maximum return potential.
Author: Alan Ellman