92.4% win rate. An annualized return of 21.4%. Those are the results of Florida retail trader Brian Terry’s “In The Money Covered Call” strategy this year. 

It is a conservative option selling strategy with some downside protection. Brian tells us that he has traded it for about five years and that the results have been consistent.

I have also traded it for a few months as a supplement to my bread-and-butter strategy 0DTE Breakeven Iron Condor. My results are at the same level as Brian’s.

We sat down with Brian for a detailed walk-through of his strategy.  I recommend that you watch the full interview if you are curious about this strategy.

THE SHORT VERSION: The article explains the “In The Money Covered Call” strategy as a conservative way to generate consistent income while providing downside protection.
– The strategy involves buying shares of a stable company or ETF and selling an In The Money call option with around two weeks to expiration.
– It works by collecting a premium from the sale of the option, benefiting from time decay rather than stock movement.
– Downside protection allows you to profit even if the stock drops by around 7-8%.
– Ideal for conservative traders aiming for an annual return of 21% with low risk.
– Key rules include avoiding earnings season and using an 8% stop-loss to manage risks effectively.

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Watch our full interview with Brian here

ITM Covered Call summed up

The strategy is quite simple:

– Buy shares in a stable company or ETF

– Sell an In The Money Call with about two weeks of expiration

– Choose a strike price that is below the expected move for that period

– Make sure you get enough credit for an annualized return of 20 – 30 percent. 

Two terms are important to understand the strategy:

– Covered call: When you sell a call against shares you own.

– In The Money (ITM): An option that has intrinsic value. 

ITM Covered Call is a conservative income strategy. It does offer a downside protection. Typically the share price can fall 7-8 percent before the expiration of the call – and you will still make money. 

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How do you make money with the strategy?

ITM Covered Call is a pure theta play. You do not profit from the movement in the shares – all your profit comes from the time decay of the call you have sold. 

With this strategy you expect to be assigned the shares at expiration, in fact, that is what you want to happen. 

The risk profile of ITM Covered Call

We asked Brian Terry how he would rate the risk profile of his strategy – with 1 being “Very low risk” and 10 “Very high risk”. He gave it a 3, pointing out that the strategy does offer some downside protection.

How he picks stocks and ETFs

One of Brian’s key criteria for selecting stocks is low volatility. He avoids high-beta stocks like Tesla or Nvidia, which tend to swing wildly in price. Instead, he focuses on conservative companies and sector ETFs that tend to move with less volatility.

Another important factor is dividend-paying stocks. If a stock is going ex-dividend soon, Brian will factor in the upcoming dividend payment as part of his trade setup. By capturing the dividend and selling an ITM call, he can further boost the income generated from the trade.

The process of making a watchlist

Every Sunday, Brian curates a weekly watchlist of potential trades. He monitors sectors to see which ones are performing the best and then narrows down his choices to the strongest stocks within those sectors. In his watchlist, he includes:

– The stock ticker

– Current stock price

– The strike price of the call option he’s selling

– The expected move of the stock during the trade period

– The downside protection offered by the premium

This detailed approach ensures that Brian always has a clear understanding of the trade’s potential and the level of risk involved.

Rules for taking losses

Even with a 90% win rate, Brian knows that not every trade will be profitable. He follows a strict rule for cutting losses: an 8% stop-loss on the stock price. For example, if he buys a stock at $100, he will exit the position if it drops below $92. This keeps his losses manageable and ensures that he can quickly redeploy capital into other trades.

Other management rules

Another important aspect of Brian’s strategy is avoiding trades during earnings season. Earnings reports can cause significant volatility in stock prices, so he avoids trading stocks that have upcoming earnings reports. Additionally, he typically allows the shares to be called away at the strike price, preferring to rotate capital into new opportunities rather than holding onto shares for long periods.

Who is the strategy best for?

Brian’s ITM Covered Call strategy is best suited for conservative, income-focused traders. It’s ideal for those looking to generate a steady 2% per month (or 21% per year) without taking on excessive risk. The strategy provides downside protection, making it less stressful than more aggressive trading strategies. It’s particularly well-suited for retail traders who want to earn consistent returns with minimal involvement in high-risk or speculative stocks.

The Conservative Covered Calls Facebook group

In addition to his trading, Brian also runs a Facebook group called Conservative Covered Calls, where he shares his trades and insights with a community of like-minded traders. The group focuses on low-risk covered call strategies, and members are encouraged to share their trades and ideas. With over 3,000 members, the group offers a supportive environment for traders to learn and improve their income-generation strategies.