Covered Call Writing

I was fairly clueless to option trading before this year. I understood the basic concepts but never did any.

I’ve been getting into covered call writing and really enjoying it. But I’m wondering if there’s anyone else here with experience so I don’t make bad mistakes. I’m kind of winging it.

My general concept has been to buy either of two types of stocks:

  1. those with low P/E and I am bullish on. Like Walgreens and CVS. So that if the stock drops significantly, I don’t feel bad about holding it.

  2. those with low per share prices, of $50 or less, with massive volatility. The WSB meme stocks like Rocket mortgage (RKT) whereby there’s enormous IV priced into the option. For example, I bought shares of rocket this week around $19.75 and sold $20 covered calls for 27 cents expiring in a few days. The reason is that these must be done in 100 share increments so buying $5k of a stock to write options on is appropriate for my portfolio size. But buying 100 shares of Tesla at $400 is not.

So rocket got called away and I make 50 cents per share. If rocket dropped, I’d keep it and sell more calls. It did get called

I have also been toying with a third class:

  1. low p/e and high dividend in an industry I’m bullish on like archer daniel midland. For these, sell 2 year LEAPS calls. As a rough example, I bought some for $45 a share, it pays a 4% dividend, and the 2 year $50 calls were $4.

So if they get called away I make $9 per share plus the 4% dividends per year for 2 years. Unless they get called early, but then I free up my capital sooner.

If it drops 10% then I broke even given the option premium I pocketed.

A few random thoughts I’m not sure of:

When the stock drops a lot, because it’s a volatile stock, I’m not sure if I should sell new calls after the weeklies expire, or if I hold and wait for it to go up, and then sell calls while it’s back up. On one hand, I make more money waiting, assuming it does pop up and down 5% each week. On the other hand it could stay down or drop further and I’m getting nothing in option premiums by waiting.

So lately on volatile stocks if they drop 10%, I buy more. And then sell options based on being slightly higher than the average cost of my shares.

Example, I bought rocket at around 22, sold some worthless calls, it dropped to 17, I bought more, my average cost per share was 19.50 so I sold $20 strike calls. The problem is this strategy assumes it goes back up. It could drop to 14 and I buy more and then 12 and I buy more and I’m catching a falling knife.

It seems like the more the stock moves drop, the more the IV. By definition, so the more option premium I get.

A few times I had a stock, Redfin was one, I bought around 42, wrote 45 calls, and it spiked to 50 in the middle of the 3-week call I wrote, but dropped back down just below 45 at expiration and I kept it. Plus the $4 per share option premium. And repeated the following week. So with these massive volatility stocks, it seems like doing 3 week ones can be worthwhile.

A few times I wrote a 3 or 4 week call option, and it dipped, so I closed out the option, by buying a call from someone else, and made a slight profit, and sat on the stock a few days for it to go back up. And then I sold new calls for a lot more money. Compared to if I had held until expiration.

Bid-ask spreads suck on a lot of these thinly traded options. For those I need to hold to expiration to let expire worthless or get called away.

This week I got burned a bit by CVS since I was very bullish on them but the stock has been doing poorly so I wrote options only a few dollars above what I paid. And today they spiked 5% above my strike price and I missed out on potential tendies. This was my mistake because I didn’t realize earnings was today and otherwise I might not have sold options this week. Since I’d want to take the bet myself.

Overall it seems like a fascinating way to make money. I consider it a hybrid cash-stock investment, since it’s generating cash flow but there’s equity risk in it. Although depending on how I play, the risk is smaller.

I had an idea that I’m playing with today of selling ITM calls. For example since my shares of palantir got called away today, I bought some more shares at $14 and sold ITM $11.50 calls for $2.91 to strike in 2 weeks.

So if palantir stays high, the. I made 41 cents per share in option premium since it will get called away in 2 weeks. That’s 2.9% gain for 2 weeks or 76% annualized return.

If palantir drops below 11.50, I keep it, and that sucks because I paid 14, but I got 2.91 per share so it has to drop below 11.10 for me to have lost money. And even if it does, I’ll write $11.50 calls on it for another 2 weeks.

I’m still trying to figure this stuff out and not sure if there’s any good resources to discuss it.


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I’ve been doing something similar too. There were times where I wish I didn’t sell the covered calls because the stock kept going up after it hit the strike price for what? Just for a little bit of income. Yes - JPM, BAC. I’m looking at you guys. Feels like you win some, you lose some.


I got burned by this twice this week. On Palantir and CVS both with double digit percentage growth.

It’s making me rethink the strategy. And whether I want to bother.

I’m assuming the tail risk if the stock drops but not benefiting from the potential gain on the other side of the tail.

I assumed it was something worth trying since there’s clearly people doing it, market makers for example.

I did have an interesting idea but the math doesn’t quite work out to make it worthwhile.

I saw an SPY deep ITM $25 call with a 3 month strike going for what would give me a 1.2% annualized return over the next 3 months. So if SP500 drops below $250 from its current $3500 then I’m screwed but so is the entire globe. 99.999999% of the time I make 1.2% profit annualized for those 3 months.

It didn’t shake out for future strike dates, due to low volume and low interest in a potential buyer. Who wants a $25 SPY call for $330? When you can buy SPY for $24.50 more

Also I’m getting more than 1.2% on my CDs for the next 3 months but I may explore this strategy if it gives a yield near my CDs because I have a massive capital loss this year from tax loss harvesting and I can only take $3k a year against my non capital gains income, but if I do some deep ITM covered call writing then the 1.2% gain from this example is capital gains and I can write it all off against my carry forward losses.

I imagine there’s market makers doing this. It scary for me to think about because by the time I execute the trade to buy the stock, the option price might swing. And for the thinly traded future $25 SPY calls, they were bidding so low, I’d be losing 0.5% over the time period to sell the call! Although I just realized I get to keep the dividends so forgot to factor that into even the 1.2% gain example earlier.

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Right you’re selling the upside and the question is if you’re getting a fair price in the call premium for it or not. The market makers are not taking that tail risk, because they hedge by trading long or short the common stock continuously and are only at risk on big overnight gaps.

I think lots of people like the idea of (out of the money) covered calls psychologically- you find a stock you like and already own, so you’re taking the downside risk anyway, and now someone offers you “free money” or “extra yield” or however you think about the call premium just for holding it and maybe being taken out at a nice premium. If they get called, they’re happy to have been right on the long, and don’t mind the lost profits as much as they should. It does also lower your risk profile, but so does selling some stock into cash without the downside risk.

The market is pretty efficient for options and the spreads are fairly bad. Unless you have a strong view on the upcoming future volatility for the stock during the time period of your option (you should think it will be lower than anticipated for selling calls), just look for something else to do.


Absolutely agree with xerty. I sell covered calls because I try to be disciplined with my sell price. Rather than it being a moving target as the stock goes up, the covered calls allow me to take the emotion out of questioning if I should sell. Plus the extra bit of income help too.


It works similar for buy price. Short puts are an equivalent position to covered calls, where basically you get a premium for committing to set up a limit buy order.


Yeah, but outside of biotechs and a a few other weird situations, big gaps down are a lot more common than big gaps up. This means you want to be more sure about writing short puts due to the adverse selection of when you’re getting assigned it’s because something really bad happened to the company or the market. Writing covered calls is a bit less bad that way, unless of course your stock is a merger buyout candidate and you didn’t realize this and sold it too cheap via your options when the buyer shows up for the whole company at a nice premium bigger than the one you sold for.


Being equivalent, this seems to only be a difference of “the person might not quantify their risk and the broker might let them take on more risk”, right?

Gapping down with a covered call has the same loss in the value of the underlying.
(I’m probably missing something…)


No, I think you’re right, it’s more me saying it differently (confusingly?)for how I think about it. Short a naked put is the same as long the stock and the (covered) call at the same strike.


I thought about doing this but one big scenario came to mind.

Suppose I was willing to buy more gold if it dropped 10%. Then I sell naked puts on gold GLD 10% OTM.

If gold drops 10% exactly then perfecto, I bought it for slightly cheaper than 10% lower than market price at the time I sold the put because I got the option premium.

But if gold dropped 10% with a week left to expiration, and then drops another 10% at expiration, then I overpaid for gold by a lot more than the option premium.

And if gold drops 10% with a week left to expiry and then goes up 20%, my short option expires worthless, I pocket the premium, but I missed out on a gold buying opportunity in the dip.

Similar to selling covered calls. Suppose I sell a covered call for 10% OTM and stock rises 20% and then drops by expiry to be 5% lower than when I wrote the option. I missed it opportunity to sell for a 10% profit because I was waiting for the stock to be called away.

Now, it was said market makers will buy long or short underlying securities to hedge against this. I haven’t thought this through. Can someone explain the 3 bad situations I described above and how I could hedge them?

I’ll try to work it out here stream of consciousness style:

Sell naked put on GLD 10% OTM. It drops 10%. I want to buy GLD at this price but don’t want to risk the price increasing before expiration and thus not being put the stock to buy.

So I could buy GLD shares at this point in time when they have dropped 10%, but I risk them dropping further and me being put the stock to buy at expiration and now I have double the GLD I wanted and I’m down significantly since I overpaid for the GLD put to me that dropped more than strike price plus option premium, and I’m down on the GLD I bought shares of at the strike price.

I could buy GLD and then buy my own protective puts on GLD, perhaps at the money so if it drops more I’m able to ditch the shares I just bought but the option premium on these protective puts will be huge relative to the option premium I got for writing the puts before it dropped 10% and caused an IV spike.

I could wait until gold drops 10% and buy calls at the money so if gold goes back up and the short puts I sold expire worthless, I’m able to buy gold at -10% due to my calls. But again, I expect the option premium to be very high relative to the premium I sold the puts at.

I could see this making sense if perhaps I was betting against volatility, and thus 90% of the time the puts I sell expire worthless and the 10% of the time they don’t, I am forced to hedge at a cost higher than the premium of that transaction but in aggregate, I’m making a profit over a large number of such transactions over time. However, this doesn’t seem like a hedge, it seems like a bet.

So, if I wanted to play market maker, how would I do so? I have strict buy and sell prices for certain securities, specifically GLD and SPY. If they drop below a certain point I want to buy them, and if they go above a certain point I want to sell some to rebalance.

How can I effectively take the GLD and SPY shares I hold, and sell covered calls to not only exit with profits but make additional money from the option premium but not risk that the stock moves down before expiry and I lose out on the sale at higher price?

And how can I write naked puts on them so if they drop I buy them, but if they drop with time left in the contract, I don’t risk missing out on a buy at the dip, if it rises again mid contract?

There are other nuances. An old trade sequence of mine on Whole Foods pre-Amazon:
SOLD 10 WHOLE FOODS MARKET 09/16/2016 $30 Put: $572.25 ($580 net of commission)
BOUGHT 10 WHOLE FOODS MARKET 09/16/2016 $27 Put $86.69

Note the lower put was purchased as insurance, so I had at most $3000 at risk (I could have spent a little more for a put with a later strike date)

BOUGHT WHOLE FOODS MARKET (Symbol: WFM) 1000@30 30008.95

SOLD WHOLE FOODS MARKET 11/18/2016 $30 Call 10 $963.29

Qualified Dividend WHOLE FOODS MARKET: WFM 135.00


So with $3000 originally at risk and a stake of $30k, I netted $1565.30 in 3 months (around 5.2% in three months, 20.9% annualized buying and selling the stock at the same price.

Back to the well:
SOLD 01/20/2017 $30.5 Put (Symbol: WFM 01/20/2017 30.50 P) 10 $373.30

SOLD 03/17/2017 $29 Put (Symbol: WFM 03/17/2017 29.00 P) 10 $268.29

SOLD 06/16/2017 $35 Put (Symbol: WFM 06/16/2017 35.00 P) 10 $688.39

All of the above expired worthless, the last was after the AMZN announcement. Naked puts require you have cash on hand to cover possible transactions.

I’d pick a few stocks to follow (I have a few on my current list) that you think are a good purchase at the strike price. I recently had a similar transaction on another stock (bought and sold stock @ 50, originally sold 6/19/20 puts for $2.95 [put to me @ 50]; sold 8/21/20 55 calls at $1.29 [expired], 9/14/20 collected 0.10 dividend; sold 11/20/20 50 calls at $2.01 [exercised; stock at $53.33] – yielding 6.35/share in 5 months (12.7% over five months, about 30% annualized after commissions – I made less ($4.65/sh), as I also spent some of the money from the original sale of puts to purchase calls at a higher strike price: those expired worthless).