20 Minute Read

My Newfound Love of Covered Calls

March 20, 2016

By | 17 Comments

Tackle 25 Covered Calls Premium System. Covered Calls are ideal for your IRA and can help you compound those gains and generate cashflow. Click on the image to get this premium trading system right away.

Last update: July 2021

I’ve unleashed more than a few articles on covered calls lately. And to top it off this is a strategy I’ve focused on in my weekly trading labs, especially my intro labs. One of my lab participants recently emailed me and asked why I put so much emphasis on covered calls.

Though I’ve highlighted the varying advantages in my previous posts I thought I’d add a little more insight into why I’ve cozied up to covered calls. This will be my final covered call love-fest, at least for a spell.

Investigation and Implementation

When I sink my teeth into a strategy I want to learn everything about it. I want to know what lies beneath the surface. What are its quirks, its idiosyncrasies? What makes it tick? When does it work and when does it not work?  What is the best possible approach for its implementation? The torrent of covered call centered pieces I’ve crafted over the past few months, and many discussions you haven’t participated in unless you have the ultimate pleasure of being in my lab, have enabled me to flesh out the covered call play in all its glittering glory.

So why all the attention? Because I’m a thorough knowledge seeker who wants to know how to craft the perfect covered call system. Yes, it’s a personal reason, but you all benefit as well. In my selfish quest to master the buy-write I’ve undoubtedly left golden nuggets of wisdom in my wake. Did you pick them up?

Simplicity is the Ultimate Sophistication

Credit goes to my buddy Leonardo da Vinci for that subheading. Yet a second reason why I have given the covered call so much attention of late is because it’s a simple strategy that can ease stock traders into the wide world of options. Some have referred to covered calls as the gateway strategy. There it stands at the entrance to option land just waiting to welcome you into the domain of derivatives. It’s a simple strategy, palatable for the rookies, yet revolutionary in its effect.

It eases you into option writing, cost basis reduction, probability of profit elevation, and income generation. I’m getting excited just writing about it for heaven’s sake. Best of all it beats the pants off of buy and hold in the long run.

Tortoise and the Hare

My initial exposure to Wall Street was all about active trading. Passive investing was poo pooed with prejudice. As a result I was too dismissive of share accumulation. Tortoises are shmucks I thought. I wanted to be the hare. It’s sexier, appealed to my inner greed, and like most twenty somethings it was tough to think about 10, 20, or 30 years into the future. Slowly buying shares of SPY? Pffft… Not for me.

But now, I’m seasoned. Like many sages before me I too have learned that aging breeds wisdom. The older I become the more I realize how smart old people are. Self-serving statement? Indeed. But it’s true.

Let’s go through a little thought experiment. Suppose that in addition to my rabbit approach I also threw a few bones to my inner tortoise by fully funding two Roth IRAs for myself and my wife each year. I was married in 2008 so I would have been able to fund the pair of IRAs for nine years. For 2008 through 2012 I could have input $10k ($5K apiece). For 2013 through 2016 I could have input $11k ($5.5k apiece – contribution limits were raised). All told that’s $94k invested. Now, where would I have put it? Let’s keep it simple and assume I purchased shares of SPY every year; as many as possible with the monies invested. At this point I would probably own upwards of 700 shares of SPY. Now, think of the type of cash flow generation I could score with my growing collection.

First, SPY spits off an annual dividend of $4.84 which means my 700 shares would provide $3,388 annually just in dividends. On top of that I could sell seven covered calls every month. Suppose I sold one month 30 delta calls. At the time of this writing SPY is at $192.75 and March options are one month away. I could sell the March 198 call (it has a 30 delta) for $1.80 of premium. Selling seven of those would deliver $1,260 of monthly income. Annually that’s $15,120.

Yes, that prior paragraph is fraught with caveats. First, the premium afforded by the calls each month will vary depending on market conditions (implied vol levels, primarily). Some months you’ll score more than $1.80, others you’ll score less. Second, some months you will have to buyback the calls at a loss if SPY rises too far. So, I highly doubt you actually capture the entire $15,120.

But who cares?

Even if you only captured half that you’re still looking at around $7,000 plus the $3.388 in dividends annually. Not too shabby for a tortoise approach. And I haven’t even got to how much that 700 shares would have appreciated in value over the nine years. You’d obviously be sitting on a substantial unrealized gain as well.

Don’t short change the covered call by focusing on its performance on any given month on some random stock. As you lengthen your view of how it performs on an ETF like SPY, QQQ, or IWM over years its myriad advantages become manifest. In the long run the beloved covered call looks Scarlett Johansson attractive.

Covered Call Heart

Time Heals All Wounds

Successful strategies share a number of common characteristics. Chief among them is the ability to generate positive results over time. Duh, I know. But just as important is your confidence that the strategy will eventually deliver the goods. If you lack the faith that your strategy of choice will allow you to win in the end, you’ll give up when the going gets tough. You won’t have the emotional fortitude to talk yourself off the ledge in the midst of a nasty drawdown and you’ll bail on your strategy blowing your chances of profits to smithereens in the process.

One thing I love about the idea of buying SPY (or DIA, IWM, QQQ) and selling covered calls is its probability of eventual profit. Its likelihood of success is insanely high. Allow me to share a gem of a chart. Perhaps my favorite in a glorious passive investing training I’ve created over the years. The graphic comes from a Morgan Housel article I came across awhile back.

The Motley Fool - Total Real Market Returns 1871 - 2012

The graphic looks at monthly S&P 500 prices from 1871 to 2012 and illustrates the percentage of periods that earned a positive return based on various hold times. Basically how often would you have been up money over X days/months/years. “Total real market returns” means the data was adjusted for both dividends and inflation.

The takeaway is that your odds of achieving a profit when buying and holding the S&P 500 (SPY being the easiest vehicle) increases the longer your hold time. And, historically anyway, there’s never been a 20 year period where you have lost money. Now, that’s assuming you simply bought once and held for 20 years. But who the heck does that? Most mortals don’t have all the money they want to invest at once. They work hard and accumulate more money year after year resulting in incremental investments. The odds of capturing a profit are undoubtedly higher if you’re buying more shares of SPY along the way. For example, maybe you threw in $500 every month over the 20 years. The consistent buying would have generated below-average costs leading to above-average gains. I’d be willing to bet virtually 100% of every five to seven year periods you were up money using that approach.

And that’s not taking into account selling covered calls along the way. With that tactic the length of time needed to have a 100% chance of profits would be far less.

To be clear, all an underwater SPY covered call position really needs to resurface and deliver precious profit-filled oxygen is time. Turns out for Index ETF covered calls time does heal all wounds. Such a thought envelopes me in comfort during drawdowns and whispers in my ear to stay the course.

Tackle Trading Resources on Covered Calls

Continue learning about this powerful options trading strategy: the Covered Call. Tackle Trading has all the resources you need to MASTER this strategy like a PRO.

Covered Call For Beginners [Free Articles]


Options Theory: Collaring Earnings

Earnings season is upon us. Whether it’s a straight stock position, you’re holding for the long run, or one that you’re selling covered calls on there is a straightforward way to limit your risk.It’s called a collar.

Read More »

Tackle Today: Do you trade Covered Calls?

Last update: August 2021 ≈ Cash Flow and Growth ≈ I put a poll question in the clubhouse recently asking the Tackle Trading community a simple question: Do you trade Covered Calls? If you haven’t answered the question yet, you still can HERE. Of the 5 potential answers, the breakdown was interesting. 38% said YES

Read More »

Portfolio Protection For Beginners [Free Articles]

bear market survival guide

Long Put: IWM or RUT

In this video tutorial, Coach Matt walks thru how he has been handling the additional macro risk in the market by trading Long Put options on the IWM.

Read More »

Trading Journals are essential for any successful trader. Click on the image to purchase our Trading Journals Bundle at a special price.

Trading Journals

Good traders keep excellent records. Quality trading journals are essential to your progress and growth as a trader and keeping good records will help you learn more from both your income and expense trades.

Learn more about HOW the Tackle Trading Journals can help you become a professional trader.

Reports [Premium Content]

The Weekly Premium Reports are a part of the PRO subscription.

Tackle Trading Playbook [FREE for PRO Members]

PRO Members now have unfettered access to the Tackle Coaches’ personal playbook containing thirty-one powerful trading strategies categorized according to the Options Greeks. Bullish, bearish, or neutral market conditions, this Playbook will help you dial up the right call more often and with greater confidence.

Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.

17 Replies to “My Newfound Love of Covered Calls”

  1. BONNIELEAHY says:

    Your unique insights are very much appreciated. Your writings have become a “must read”. Thank you!

  2. MatthewMcQueary says:

    Tyler, great article, great artwork. Have you turned that into a tattoo yet?

    1. Tyler Craig CMT says:

      lol. Didn’t think about that. But if you want to I’m sure we would give you a dedicated page just to show it off, “Trader Tats”

  3. ERICSIMMS says:

    Excellent article, as usual. My favorite way to get into a long shares position is to start with naked puts on a stock or ETF you want to own strategically. I think a little analysis on the probable directions that could go make it a favorable way to acquire positions. If the underlying goes down, you might have the stock or ETF put to you in which case you bought it at a discount in the amount of the premium versus having made a direct purchase of shares instead of selling the puts. If the underlying remains unchanged on naked puts sold ATM, again, you may acquire the underlying at a discount in the amount of the premium or just keep rolling it out for more premium. If the underlying goes up in price, then close your naked puts early once delta has put all the extrinsic value in your pocket early. While you won’t get the same gain as owning the stock in this bull run scenario, you will have faster turn-over premium earning puts with about 1/2 the delta action without actually owning any shares. Seems like a win-win-win scenario to me. Owning shares only outperforms the straight bull run scenario.

    Best regards,


  4. RENARadich says:

    Hey Tyler….
    anyway to access those past labs
    you lavished on cover’d call topic?

    …brand new to Tkl-Trd’g

    love the article…
    written word is not as effictive
    for my dysleic brain which thrives
    on pics & verbal how toos….
    (sounds like tattoos…Ha!)

    my total best friend!!!!

    Thanks a bunch for the Cvd-Cal love fest!

    totally inspired/inspiring artwork!!!! :-))

    1. Tyler Craig CMT says:

      Hi Rena,

      Welcome to Tackle Trading! The Trading Labs are provided through Elite Legacy Education so you’d have to sign up for my lab through the office. We always welcome new traders so feel free to join up whenever you want!

  5. DaveKaufmann says:

    Another great article! Thanks Tyler

  6. This was great. I had to laugh at the Scarlett Johansson reference, as I just read “Beware the Wall Street Carnival” yesterday, where you said, “I can even make buy and hold look like Scarlet Johansson if you really pressed me on it.” I see a theme developing here. Ha! Great article!

    1. Tyler Craig CMT says:

      Ha, thanks. I need to mix-up my references. Maybe Charlize Theron attractive next time…

  7. PeterLuchsinger says:

    Thanks Tyler,
    Your clearly written and positively encouraging article has lifted my spirits today. I can’t wait to get into your lab.

  8. Sundar says:

    Another interesting read. Appreciate your taking the time to share with us your insights. Thanks Tyler!

  9. Tyler Craig CMT says:

    Thanks Matt. Agree 100%.

Comments are closed.

Chart Modal

Tackle Trading

Book a FREE Consultation

Sign up for a free consultation to build your Educational Plan.