CSOVs maximize capital efficiency by exploiting the boundedness of call spread payouts. We define the capital multiplier:
This tells us the maximum number of spreads that can be created per unit of underlying liquidity. When this number is greater than one, underlying capital can be more productive than when writing covered calls. For instance, a 10% - 30% OTM spread can back 6.5 spreads, as opposed to only one covered call. Note that taking advantage of this “embedded leverage” comes with heightened collateral risk. For example, if the expiration price happens to fall exactly on the higher strike (K2), and the maximum number of contracts has been filled, you will lose all of the collateral deposited.