Covered Call Opening — Selection and Pricing

Overview

• Generate short‑call candidates across eligible expirations.
• Apply prefilters: credit, delta band, bid/ask cap, strike floors, EDM/EPR caps.
• Price each remaining chain; compute a viabilityScore.
• Select the highest‑score candidate; pass opening order gates.

Baselines and modes

• Preserve‑equities: min credit 0.40; min DTE 4.
• Low underlying (< 50): lower credit floor.
• Bid/ask cap: 0.50 (relaxed to 1.25 when few strikes).
• Hedging policy may clamp max delta, min DTE, max spread by regime (VIX/liquidity/user type).

Delta and DTE regimes

• Base max delta 32; hedging/non‑preferred path up to 34.
• Preserve‑equities caps: max delta ≤ 22; max EDM‑Up delta 50 (70 if EPR% ≤ 30). If EPR% ≤ 15 and not preserve‑equities: max 28.
• Underlying under 10: max delta 22.
• Very low price (< 5) non‑preserve: max 49, min mark change −0.10, DTE window ×1.25.
• High‑vol/down day: min mark change −20, max delta ×0.8, DTE window ×1.25; up day: min mark change +0.05, max delta ×0.95.
• Quote guardrails: if underlying delta ≤ 0 or EDM‑Up delta ≤ 0 → max delta 6 and max EDM‑Up delta 30; otherwise cap max delta to min(current, underlying delta − 2, EDM‑Up delta).
• EDM‑Up delta caps: if EPR% > 70 → max 90; if long puts exist → max 60.
• Coverage‑thin: if available covered‑call position delta < 50 → cap max delta to preserve‑equities ceiling and set max EDM‑Up delta 50.
• PM over‑coverage guard: when active short calls exceed stock coverage, cap max delta ~20.

EDM‑Up gain cap

• Per‑candidate max EDM‑Up “gain” from underlying EDM‑Up and configured floors.
• Tighter for uncovered calls; tighter when long puts exist.

Concurrency and strike floors

• Max short calls per expiration scales with long delta: 1 by default; 2 when effective net‑delta > 400; 3 when > 700; 4 when > 1200.
• Expirations already at the cap are removed from consideration.
• Strike floor: never sell below the lowest strike closed/filled earlier today (cached briefly to reduce load).

Prefilters and low‑vol grace

• Prefilters: DTE window; valid/standard chains; min credit; delta band (e.g., remove deltas below 2 and above the current cap); max bid/ask; min mark‑change (dynamic; can be bypassed in “viable‑only” scans); strike floors; max EDM‑Up delta/gain.
• Peer‑average expected return tracked across candidates.
• Grace when IV < 5DMA or peer average < 3%: scale penalties by 50% and floor viability at 0.04.

Pricing pipelines (opening)

Short Chain Open Pricing

• Validate expected‑move inputs; block non‑standard chains.
• Set directional EM and reference prices; pick effective mark.
• Compute max loss; open/close anchors; max profit and profit‑to‑risk (plRatioMax).
• Map strike distances to probability and breakeven (EMdir × 2 sigma proxy).
• Net win probability and expected overall profit; seed viability from volatility; adjust for theta and micro‑quality (bid/ask%, mark‑last%).

Covered Call Chain Open Pricing

• Volatility relative‑strength bonus (secondary) to emphasize strong IV setups.
• Set max loss to zero; compute strike distance and long‑share carry.
• openPrice = mark × open‑spread; apply recent‑fill discount and tiny randomness last.
• Compute ROI and returnExpected; penalize APR headwind and EDM‑Up risk; enforce raw‑credit minimums and “minimum remaining” guards; apply an EDM‑Up delta comparator; softly prefer higher net EDM‑Up gain; overweight returnExpected.

Ordering pipelines (opening)

Base instrument

• Cached decision short‑circuit when previously evaluated.
• Trade present; price basis primed; no conflict with active closes; buying power known; honors do‑not‑open.
• Mark base‑instrument open‑ready on pass.

Base option

• Cached decision short‑circuit when previously evaluated.
• Option healthy; strike present; price basis sane; side/position coherence; no conflicting roll/close.
• Mark base‑option open‑ready on pass.

Covered call

• Cached CC decision short‑circuit; new‑user daily cap; same‑underlying daily guard; buying power present; prior‑fill heuristic.
• Risk gates: underlying delta < 70; EDM‑Up gain must be positive; net‑delta cap (≤ one net contract change); minimum EDM‑Up delta.
• Open‑pricing risk gates: block when net EDM‑Up gain (post open‑price) is below minimum; EPR‑Up should not reduce the underlying except staged exceptions; stash delta context for reporting.
• Capacity and availability: PM vs non‑PM thresholds (e.g., available covered‑call delta < 40 blocks opens when not rolling); per‑underlying caps; resource/position coherence; active‑order duplication and price‑basis collision guards; seasonality/RSI over‑hedge guards.
• Account‑level caps and approvals: enforce global EPR‑Up limits; PM approval‑specific nuance for short‑call‑only approvals and strictness; retirement accounts may require rolling context and can cancel conflicting stock closes near next‑hundred coverage.
• Mark covered‑call open‑ready on pass.

Formulas (simplified)

• Expected move: EM = spot × (IV/100) × sqrt(DTE/365); fallback 0.75 × spot if IV invalid.
• Directional EM: price‑weighted nearest OTM and neighbors (60/30/10), then ×1.25; use as sigma proxy ×2 for z‑scores.
• Probability mapping: if EMdir is unavailable, use a small default probability (e.g., 0.01) to avoid overconfidence.
• BSM pricing (with dividend yield): standard d1/d2; greeks per BSM.
• IV from price: search σ 0.01→3.00; bracket and interpolate; clamp tiny values.

Covered‑call open‑pricing values (tracked)

• Inputs/state: isRolling; net short‑call qty; available coverage (qty/delta); active opening order qty; StockDelta; quoteDelta; netEdmUpGain.
• Carry/strike: strike − spot; longSharesCost; daily carry; daily dividend; carryCostGross/Net (DTE aware).
• Pricing/returns: openPrice; ROI; returnExpected; EMdir; expectedMoveProbability; expected/current short‑strike diffs.
• Quality/risk: bidAskSpreadPercent; markLastSpreadPercent; volatility vs 5DMA; edmUpDelta/gain; low‑vol grace eligibility; peerAverageReturnExpected.
• Scoring: viabilityScore after returns, IV, delta, EDM‑Up, APR headwind, and grace adjustments.

Policy and caching notes

• Per‑expiration directional expected move is cached briefly; TTL scales with VIX (shorter when VIX is moving).
• A centralized hedging policy can dynamically adjust minimum DTE, maximum delta, and maximum bid/ask spread.

Behavior by settings and account type

• Preserve‑equities: tighter deltas (≤22), higher min DTE, lower credit floor; stronger EDM‑Up/APR penalties; low‑vol grace helps preserve viable choices.
• Disabled preserve‑equities: allows higher deltas/shorter DTE to hedge/exit; still bounded by EDM‑Up, delta comparators, and APR headwind.
• Retirement accounts: conservative leaning; may require rolling context; can cancel conflicting stock closes near next‑hundred coverage.
• Portfolio margin: step‑up expirations with large long delta; over‑coverage delta clamps; availability thresholds (e.g., coverage delta < 40 blocks opens); same quality/price checks.

Preserve Equities: Mode Comparison

How selection and pricing lean when Preserve Equities is enabled versus disabled.

What are scalping rolls?

Scalping rolls are short‑horizon, opportunistic roll attempts that seek small net credits or risk reduction by adjusting the short call quickly (e.g., up/out) when market conditions allow. They are subject to the same safety/quality gates and position‑integrity checks as standard rolls. To prioritize keeping long‑share exposure, Toll Booth only stages scalping rolling orders when Preserve Equities is disabled.

Practical examples (conceptual)

• Preserve‑equities, quiet market: further OTM, modest credit, longer DTE; low‑vol grace prevents over‑penalizing low IV.
• Preserve‑equities disabled, choppy with high EPR Up: nearer strikes/higher deltas to hedge/exit; EDM‑Up penalties dampen aggressive picks.
• PM, large long delta: more expirations allowed; sharp delta clamps if over‑covered; block when coverage is thin.
• Retirement near new coverage lot: cancel conflicting stock close; open conservative CC anchored to carry and low assignment risk.

Glossary

Key terms: EDM/EMdir, EPR (Up/Down, eprPercent), EM, IV, APR headwind, ROI, PM, RSI, mark, bid‑ask spread%, mark‑last spread%, coverage, net delta, strike floor.

Process flow diagram

Selection → pricing → order gates for covered‑call opening.

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flowchart TB
  A([Start]) --> C1[Generate candidate chains]
  C1 --> PF[Prefilters: credit, delta, spread, floors, EDM/EPR caps]
  PF -->|None| OUT[Stop: no viable chains]
  PF --> PRICE1[Short-Chain Open Pricing]
  PRICE1 --> PRICE2[Covered-Call Pricing]
  PRICE2 --> SCORE[Compute viabilityScore]
  SCORE -->|No chain over floor| OUT
  SCORE --> PICK[Pick highest-score candidate]
  PICK --> BI[Gate 1: Base instrument]
  BI -->|Fail| OUT
  BI --> BO[Gate 2: Base option]
  BO -->|Fail| OUT
  BO --> CC[Gate 3: Covered call]
  CC -->|Fail| OUT
  CC --> BUILD[Build 1-leg STO order]
  BUILD --> SUBMIT[Submit order]
  SUBMIT --> DONE([Outcome: order placed])

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