Playbook: Asset-Based: the Covered Call

The covered call is a well-known often used income strategy (generating income on a regular basis), combining (buying of) underlyings (ETFs, stocks) and (selling of) call options. Such strategies are typically short-term. Option premium is sold on a monthly basis.

It is ‘asset-based’ since either stock, cash or other assets ‘cover’ the options sold.

Covered Call

This is one of the most used income strategies and is highly effective when done on a regular (monthly) basis.

Covered call = own/buy (long) underlying + sell (short) OTM call. Owning the stock means that you’re ‘covered’. The short call gives you downward protection.

A covered call reduces portfolio volatility and outperforms a long (uncovered) underlying position most of the time.

Selling a call against the underlying caps profit potential of the long stock.

It looks like the short put (or ‘naked put’) since it is also a bullish, simple, short-term income strategy. Such strategies are typically short-term. Bear in mind that selling a put results in less exposure to the underlying than buying/long 100 shares outright.

The position benefits from IV/IVR decreases and minimum underlying price movement. Time decay also helps because it erodes the value of the sold call .










Neutral/slightly bullish


Entry 45 DTE
Exit 21 DTE


Undefined to zero (underlying down to $0.00)

[call strike -/ – underlying price paid] + call premium

Long underlying (ATM, just OTM)
Short call (.30Δ)

GOOG Covered Call at 96 short call strike



The reason for selecting this option strategy is that you expect a low-priced underlying to slightly rise (ITM: underlying > strike price at which underlying was bought) and to pick-up short-term premium. So, you buy underlying in a down move (into strength).

You aim to buy or own underlying for the medium to long term and capture monthly income by selling calls every month (like collecting rent).

These are the considerations for entering a short put:

  • The underlying is low-priced.
  • The expectation is that the underlying (stock, ETF, etc,) will slightly rise or go sidewards.
  • Lower the risk on long underlyings.
  • Sell underlyings for profit (at call strike due to assignment).
  • Reduce cost basis of the underlying via credit/premium collection.
  • To reduce portfolio volatility.
  • Selling premium every month earns more over a period than selling a premium long way out (also: time decay is fastest towards expiry: sell them with 21 days left if possible).

If you buy or own multiples of 100 shares (say 500), you can also sell a lower number of calls (say 2), instead of covering your total underlying position.



  1. ‘Buy to open’ (BTO) 100 (long) shares of underlying (or you already own them)*.
  2. ‘ Sell to open’ (STO) one call option at .30Δ OTM for every 100 shares long (on a monthly basis)**.

* If the underlying and call option is purchases at the same time it is called a ‘buy-write’.
** Ideally around 45DTE

Please note that 30Δ is equivalent to 30 shares of exposure, reducing risk to the downside if the underlying price decreases.

Covered calls tend to work better when executed on green days in down-trending markets. So, the trick is essentially to sell the covered call on a day the stock in question is in green as the strike price will be closer, netting a higher premium.

Set up a stop loss target/alert at break-even (underlying price paid – call premium).

Another method is buying deep ITM call options. Calls are ITM if price underlying > call strike.


GOOG trading around $90.79 on 18 Dec 2022. IV/IVR >30.

Buy 100 shares and sell 1 short call at 96 strike 20 Jan OTM positive .30 delta and pay a $8.895 debit premium.







Unlimited to zero

Capped: Capped
[call strike $9600 -/ – stock price paid $9079]+ call premium $184 = $705


Stock price paid 90.79 – call premium 7.05 = 83.74

The covered call is based on the basic short call option strategy.

The covered call (having 100 shares long in underlying plus a short call) is equivalent to the short (naked) put and is therefore called also a ‘synthetic short put‘).

The covered call is uses when the short strike of a bull call vertical spread gets assigned. The short call can be assigned at ex-dividend date in the event the short call is ITM and its corresponding value < the dividend. This results in (probably unwanted) stock: in that case close the 100 short shares and a long call as a single Covered Call order.

The Greeks





Delta (direction speed)


Positive and falls to zero after the position reaches its maximum profit potential after the stock has risen above the strike price.

(See also same profile short naked put)

Gamma (acceleration)

Always negative with naked put (because it is sold/shorted), and peaks inversely when Delta is at its fastest (steepest: around strike price /ATM)

(See also same profile short naked put)

Theta (time decay)


Positive since time decay works helps the short put option.

(See also same profile short naked put)

Vega (volatility)

Volatility is hurtful to the position since higher volatility = higher option value

(See also same profile short naked put)

Rho (interest)


Negative , higher interest rates are harmful to the position (buy not much since short term)

(NOT the same profile as short naked put)

Entry Rules

Profitable covered calls require correctly selecting bullish underlyings AND good timing.


  • Look at either of the next two expirations and compare monthly yields: look for >3% monthly initial cash yield
  • Acknowledge whether market sentiment allows trade.
  • Check whether trade fits in portfolio allocation rules.
  • Ensure the underlying meets all of your selection criteria (volume, open interest, ask-bid range, etc.).
  • IV/IVR above 30%.
  • Ensure the trend is upward/bullish.
  • Ensure at least three of the technical momentum indicators are positive.
  • Identify the clear areas of support and resistance.
  • Make sure there are no major events (dividends, earnings) within 30 days of the expiry date.
  • Profitability of Profit at selected strike: around 50%.
  • Backtest (since 2006 and last 200 trades): at least $1.00 (average and mean) profit/day.

Technical Indicators Used

  1. Trend = bullish.
  2. Support & Resistance = the underlying has just experienced a pullback/decline to a clear support level.
  3. RSI = oversold.
  4. Bollinger Bands in combination with Keltner Squeeze: at the bottom and outside Keltner bands.
  5. ADX/DMI: increasing up and above 20.
  6. ATR high.

P/L and Risk Profile

Net Position

Net debit, because you buy 100 shares and get a (much smaller) premium when selling the put option.

Theoretical Profit

Call strike – underlying price + credit/premium.

As the underlying price rises, the covered call moves into profit but slows down as it approaches the strike
price and maximum profit.

Maximum gain is capped hen the underlying reaches the level of the call’s strike price.

If the stock rises above the call strike, you will get automatically exercised, and your underlying asset will be sold (all at a profit).

If it doesn’t change, you collect the short-sell call premium.

Time decay works positively with your sold call option. It will be eroding the value of your call every day, so all other things being equal, the call you sold will be declining in price every day, allowing you to buy it back for less than you bought it for unless the underlying stock has fallen, of course.

The reward is the credit, realized when the underlying price <= call strike.

If the underlying price remains below the short call: expires worthless, and the seller can keep the premium.

Theoretical Risk/Risk Profile

As the underlying price falls, the premium gives you a ‘cushion’.

Your maximum risk is the price you paid for the underlying less the premium you received for the call. However, losses can become substantial, since the underlying price can go below breakeven to $0, so this can be considered an unlimited risk.


Underlying price -/- net call premium/credit.

Managing and Closing Position

Halfway to/Near Expiration

  • If the underlying price decreases to the short call, the short call expires worthless with the credit as profit.
  • If the underlying price is near the entry price, buy-to-close short call for profit (see below), and each time the stock is still slightly bullish, rebuild the covered call by selling another OTM call at 30 delta and repeat this.
  • If not, hold the long shares without selling another OTM call, and wait to rebuild the Covered Call, or sell the stock if its not bullish anymore.

Rules for Managing/Adjusting Position

  • Especially take care around dividend dates: if the short-term ITM calls have corresponding puts valued < the dividend, the assignment risk is high.
  • If the underlying decreases but remains above breakeven: roll a short call down for credit to reduce max loss, resulting in an ITM call (but never roll below break-even, which will lock in losses if underlying price increases).
  • To adjust a tested/breached short put strike and extend the duration of the position, roll the short put down (to around the 30 Δ put strike down AND out in time for credit.
  • Set alerts on breakeven/predetermined targets. In this case, break even.

Rules for Closing Position/Exiting the Trade

  • If the price goes above the short call strike, you will be exercised (and make a profit).
  • If the underlying price is near the entry price, buy to close a short call for profit.
  • Close the position at 50% (or greater) profit.
  • Close is possible at 21 DTE.
  • If the stock price remains above the stop loss you set (like break-even), let the call expire worthless and keep the premium (and set up a new covered call. If it goes below: sell the stock or ‘reverse’ the entire position (the call will be cheap to buy back).
  • If the stock falls below breakeven, you should either:
    • buy back the options you sold and consider selling the stock too (safest); or
    • sell the stock and let the option expire worthless (the option will have declined in value, and you may decide to buy it back to avoid additional losses if the stock suddenly bounces back) (unsafest solution since you will be exposed to the high risk of a naked short call).

Mitigating a loss

  • Work with a (mental) stop loss based on an underlying asset of either break-even or 50% or 100% of the premium paid.

Additional Notes


  • Gaining a regular (monthly) income from slightly rising or rangebound underlyings.
  • Lower risk than simply owning the underlying.


  • High cash outlay (negative effect on buying power).
  • Capped upside if the underlying rises.
  • Exposure to unlimited risk if the underlying falls (up to $0).
  • Even if you love to own the underlyings, getting assigned to a falling stock.


Especially take care around dividend dates: if the short-term ITM calls have corresponding puts valued < the dividend, the assignment risk is high.

Assignment means you lose ownership of the 100 shares at the call strike price.

In case you get called away, you can always sell a cash-secured put to put yourself in a position to acquire the same stock at a lower strike price.