Covered Call Strategy Alpha on MSTR

Why selling the 1/24 $400 call was the right strike heading into the week

Some ppl asked me why I picked the $400 call to sell based on the below tweet from Jan 17.

There are a few IV study based reasons (and this is actually the most important step of the process in deciding whether to sell or not), but the most worthwhile alpha i will drop that can cement the deal —is this:

MSTY, the covered call ETF was short the 395k calls in size heading into Jan 24. 7500 contracts. If you look at the OI you will then realize that’s a big portion of the 11k OI (more than 50%).

That’s a great set up. why? Because this means that the dealers are LONG gamma, and they are likely delta hedging the gamma risk, which means they are creating mean reversion dynamics around the $395 price. It means that dealers sell when MSTR gets nearer to 395. I chose the $400 because that afforded me a little bit extra margin of safety on getting assigned whi

le getting the juiciest yield possible.

And that’s what exactly happened. MSTR got as high as 405 on Jan 21, but couldn’t break through and came in for the rest of the week. Close call, and it went a bit higher than I expected but the tailwind was on my side.

Hope you find it interesting! And welcome to the alpha club.