Covered Calls

Juicing Returns By Selling Covered Calls

As with anything investment-related, see my disclaimers. This post deserves an additional disclaimer. Investing involves risk. Trading stock options is extremely risky and you can lose 100% of your investment. My story is provided solely for entertainment purposes and in no way do I recommend doing what I did. Or anything else, for that matter.

As with anything investment-related, see my disclaimers. Investing involves risk. My analysis is provided solely for entertainment purposes and in no way do I recommend any course of action. Don't trust random idiots like me on the internet for investing advice. Or for anything else, for that matter.

To date, I’ve kept my covered calls experiments to my shares in Dumpster Fire, Inc. By selling these calls, I’ve traded future blowout returns for down-side insurance and income generation. I’ve also used it to ease out of my position in DFI, something I had a hard time doing on my own because of psychological traps.

Recently I started wondering if I should extend my experimenting with covered calls to my other ETF holdings, particularly in my retirement accounts where I’m not penalized tax-wise for short term capital gains on the option profit.

Benefits of Covered Calls

There are many benefits of covered calls contracts.

I keep both the security and the contract premium when the contract expires out-of-the-money. My shares are generating additional cash instead of just sitting around.

I keep dividends on unexercised options. Until the option is exercised, I remain the owner of the shares and get to keep any dividends.

Covered calls provide downside insurance. If I sell a covered call for $.75/share on a security currently valued at $15/share, I don’t start losing money until the price drops below $14.25. The call premium is a downside insurance policy, of sorts.

Being exercised out of a position could provide a rebalance opportunity. If I sell the option far enough out of the money and it ends up expiring in the money, it’s possible that I would have wanted to sell it anyways to rebalance my position. I concede this is a weak benefit.

Drawbacks of Covered Calls

I’m limiting my profit. If I sell a contract for a $.75/share in premium and a strike price of $15/share, if the price of the security zooms up past $15.75/share (i.e. in-the-money) to $17/share, I don’t benefit from the movement from $15.75 to $17. I traded away potential upside in exchange for premium and downside insurance.

Brokerage fees and spreads. At Fidelity, I pay $.60/contract, and at Vanguard, I pay $1/contract. I have to pay this fee when I sell the covered call. If I choose to exit the position before expiry, I have to pay it again if I’m using Vanguard. There’s often a bid/ask spread which especially bites if I try to exit a position early.

Having to sell shares when I don’t really want to. I’ve been intentional about the ETFs and securities in my portfolio. If a position is exercised away, I either have to pay more to return to my desired allocation, or wait for it to fall back. Either way, I risk being out of an ETF that I actually want to stay in.

My shares are encumbered. By selling the covered call, I can’t move or sell the shares until either I buy the option back to close it, or the expiration date comes and goes. I’ve typically found this to be a minor annoyance.

Tax loss harvesting interference. By giving up control of the shares during the contract, it’s possible that an exercise/sell could happen at an inconvenient time, triggering a wash sale. So I’ll have to keep track of when I trigger a loss harvest.

Example Covered Call Scenario

Let’s take a look at an example. I have over 1,400 shares of VWO in my tax advantaged accounts.

When I started evaluating this in May of 2021, VWO was selling for $53.50/share. A call with a strike price of $57 expiring on September 17th, 2021 was trading for $.65/share. By selling calls against all of my shares, I immediately collect $.65 x 1,400 shares = $910 in premiums. That leaves me with three outcomes on expiration:

  • VWO is below $57. I get to keep the shares and sell more call options to collect more premium.
  • VWO is above $57 but below $57.65. My shares of VWO will be sold but I can immediately buy them back, using the premium I received in May.
  • VWO is above $57.65. My shares of VWO are sold and I lose out on any gains above $57.65. If I want VWO in my portfolio (and I do), I’ll need to buy my shares back for a higher price. I would have been better off holding my shares and either not selling calls, or selling them further out of the money but for less premium. While I haven’t lost money, I haven’t gained as much as I could have.

A few observations:

  • What’s the likelihood of VWO being at $57 in September? It would need to rise 6.54%, or over 19% annualized. Can that happen? You bet! 
  • Let’s say that VWO is just above $57 and my shares get exercised. I immediately buy them back and then sell more options, this time at a strike price of $60 or $61. This is pretty significant volatility and chances are good that the premium is going to be at least $.65, and possibly even higher. The premium I collect can help me catch up on the gains I missed out on previously.
  • If I repeat this quarter after quarter, will VWO zoom up >19.15% each time? Probably not, but who knows with my luck! I’m really liking my chances of collecting premium and getting to keep the shares at least some of the time.

A couple weeks ago, I checked in on VWO. It was trading at $53.55 and the options I’d sold for $.65/share were now selling at $.55/share. I could have bought them back and netted $140 for about six weeks of putting my shares to work.


Okay, please poke holes in my idea. I’m seriously considering it. I’ll probably start small, selling blocks of 400 or 500 shares and staggering my expiries throughout the year to reduce the risk of being completely out of a position all at once. I’m not really in it for the downside insurance, since I plan on holding these for the long term. It’s the capping of my upside that has me most worried.

Thoughts? Questions? Want to rant about how dumb of an idea this is? I’d love to see it in the comments!

Hasta luego!

10 thoughts on “Juicing Returns By Selling Covered Calls

  1. I’ve decided against this strategy mostly because:
    1) Assuming options are fairly priced, then the option premium is close to be fully offsetted by the potential outsized return that you might get if you weren’t forced to sell.
    2) I find it tiresome to look at options chains to pick my offering, which may or may not execute. I don’t enjoy it.

    I will sell a covered call instead of making a limit order if the position has an active market and I have enough shares for a contract. But with some of my positions where the share price is $100/sh., I only have enough for 1 or 2 contracts and then have to deal with a separate limit orders for the balance of shares. More hassle for a couple hundred extra. I still do it but don’t find options to be a big money maker.

    1. Thanks for your perspective. I can totally see how looking at option changes and picking an offering could get tiresome. And I suspect you’re right, that options are generally fairly priced, efficient market and all that.

      I hadn’t thought about selling a covered call instead of making a limit order. I guess I’m doing that already with DumpsterFire Inc, constantly “selling” it by my covered call. Do you do anything similar when you want to buy a stock, buying a call option instead of the underlying security?

      1. I don’t. Like ERN, I like to sell options (e.g. be the insurance provider). I see buying options like buying insurance whereas the seller won’t sell unless he/she sees a profit.

  2. Sounds kind of fun, but probably more involved than I want to get with my own retirement accounts. That said, I don’t have any experience selling covered calls so you are obviously more comfortable with them than a simple indexer like myself!

    1. Heh, I’m no option expert. I’ve only dabbled with covered calls on one security, Dumpster Fire, Inc., and that’s been in my taxable account. This is still only a thought experiment at this point.

  3. The expected return on any derivative trade is net zero. Every dollar of derivative gain is offset by the counterparty’s dollar of derivative losses. Money is not invented out of thin air. It is transferred from one party to the other.

    It is a good assumption that derivatives are fairly priced. Why? Because nobody is going to get excited about an instrument with negative expected return.

    So your strategy is reliant entirely on instruments with zero expected return. That doesn’t get me excited.

    That said, BigERN messes around with something similar and claims that he’s exploiting options mispricing. He’s smarter than me, so maybe he’s right.

    1. Thanks for your insights. I haven’t moved on this plan yet, just standing with a box of matches in my hands.

      While it’s true that option trading is a zero sum game, I have made money selling covered calls on my DumpsterFire stock. The story I’m telling myself is that there’s plenty of dreamers hitting for the fences by buying call options, and I’m betting against their ability to hit that home run.

      1. You have made money in the past because the stock price hasn’t soared. Otherwise you would have lost a ton of money on the short calls.

        Don’t let past luck cloud your judgement going forward. You got lucky gambling in the past. Luck, particularly on an undiversified equity holding, is generally not a great strategy going forward.

        If capital gains are the reasons you continue to hold the stock, why not dump to a DAF and use to pay tithing/missions? Seems like a win, win, win outcome.

        1. Thank you for your comment. The stock I’m holding has been trading in a band for the last 5 years, but is volatile enough that the option premiums can be high. I’m protected from the price soaring because they’re covered calls, not naked shorting. I know you know how options work, but I just wanted to clarify if it wasn’t clear enough. At this point it’s about $20k tied up DumpsterFire. It’s not capital gains keeping me in, but temptation to sell out-of-the money calls every three months for about $1k each time. It’s short term gains, and I should probably just sell them and walk away, even though I keep making money selling calls on the shares.

          To date, I’ve only donated appreciated shares directly from my Vanguard brokerage account. I’ve never used a DAF, mostly because I don’t care to pay fees that cut into my donation. If you were to open a DAF (or already have) where would you go?

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