Covered Calls for Income – Example of a Recent Strategy I Did with ROI [Charts]

Most investors own stocks in their portfolio with the expectation to build wealth while also getting dividend income.

Investors can sell covered calls for income on their stock holdings and receive 6 to 9 times the income that’s derived from dividends alone. They must, however, accept that they may have to sell the stock at the call option strike price, thus foregoing some potential capital gains.

Why isn’t everyone selling covered calls then? Most stock investors think they are complicated, riskier than they are, or they simply don’t know about them.

You’ll see from the high yield covered call example here, which I recently made in my IRA, covered calls are the simplest and most conservative option strategy.

Over 12 years ago I began selling covered calls on our journey to create multiple income streams after we “stumbled” into early retirement. In this article, I’ll show you exactly how I researched and sold a covered call for income recently.

Update July 2020: HP’s stock price dropped as the oil sector experienced a horrific upheaval due to global pricing disputes and lower demand from the 2020 shutdown. (Who would have known? But we have to manage risk around the unknown happening!) 

Going into this covered call investment, I knew the stock price could drop, as explained below. 

I continue to collect the generous dividend yield. Read the post see how to calculate covered call income based on the stock price rising, falling or staying the same.  

Important Note about Risk from Covered Calls

Investing with an acceptable level of risk is one of the most important things to me as both an investor over 50 and as a wealth coach, so I’ll start with this important point.

As I write this post, the stock market is nearing the longest bull (upward) market in history with valuations higher than historical averages. It may last for another decade, but it’s very unlikely in my opinion.

While I choose stocks for covered calls that appear to be undervalued, I accept the risk that any stock may drop for many reasons including an outright bear market while I own it.

layer cake - covered call income is icing on the cakeAwareness of this risk is a precursor to covered call investing, and investing in the stock market, period. Having clarified this, I’ll share a recent covered call investment that I made.

Note that I like to use the word “investment” vs “trade” for covered call writing since covered call sellers could own a stock for months, or even years.

In other words, a stock purchased as part of a month long covered call strategy could turn into a long term investment if the option isn’t exercised.

For this reason, I like to choose stocks I want to own long term anyway when I pick covered call stocks.

Then the income from covered calls is just like the delicious icing on that cake. If you think about it, millions of investors own stocks with no covered call income whatsoever.

This means they have stock market risk. If I have stock market risk, I’d like some income from it as part of my overall wealth plan.

Click here to read my post entitled How to Evaluate an Investment with more about stock market risk while building wealth.

Here is an example of a covered call I sold recently, and the steps I took, along with a screenshot from my brokerage account.

Click Here to get my eBook with our top 9 wealth building and income generating strategies (including covered calls) to retire certain. Wealth Building Strategies eBook

1. Choosing the Covered Call Stock

A few factors led me to choose Helmerich Payne, or HP.

Nowadays, I tend to buy only stock investments that allow me to write covered calls. Again, I figure if I am going to have the risk of being invested in stocks, I may as well choose stocks or ETFs that are covered call candidates.

This allows me to collect call income at least once, preferably several times, something I appreciate even more in over valued stock markets.

To enhance covered call stock holdings and lower risk even more, I like dividend paying stocks for covered call candidates.

And I prefer value stocks or anomalies in out of favor sectors. Whether I seek value stocks or growth stocks for covered calls can vary based on the overall market trend.

But in general, I prefer undervalued stocks.

(If you’re confused at this point, click here to read my post How to Understand Your Investments.) 

Since covered calls work best in bull markets, I tailor my strategy somewhat based on overall market direction, and how clear market direction is.

When making any investment, I start with my overall goals from my wealth plan first, then look at the overall markets and economy to see what might help me fulfill those goals.

For example, with stock investing nowadays, my goal is getting dividend and covered call income more so than capital gains based on the overall market as I write this. I’m not looking for the popular growth stocks in picking stocks for covered calls, especially in an over extended bull market.

Click here to read my post How to Get More Income from Your Investments. 

dog searching | covered calls for incomeAll these factors led me to explore the oil sector, where Helmerich Payne resides. And HP met all of the criteria above.

It is a dividend stock in an out of favor sector so this led me to research it more as outlined below.

In 2017 and 2018 I was selling covered calls on oil related stocks and MLPs since the industry was still pretty beaten up due to low crude prices. Many of these securities paid dividends of 9% to 20%, some of which were, admittedly, questionable for continuation as explained below.

So, I was already regularly seeking out and researching stocks in the oil sector given their out of favor status. This particular covered call example is from May 2019 when oil stocks were still out of favor, although not as badly as they had been in 2017 and 2018.

The Weekly chart from my Schwab brokerage account shows this stock was around $120 a few years ago. It also shows how low it has gone in the past few years.

All this gives me a good overall perspective of where it is now relative to it’s past.

If you are not familiar with stock charts, notice the time along the bottom and the price along the right side. Charts can seem complex at first, but they are very useful free investing tools.

chart of stock chosen for covered calls for income

Factors for Choosing This Covered Call Stock

After researching, I chose HP based on the following factors.

  • Earnings outlook
  • Financial stability
  • Dividend Yield
  • Ability to pay the dividend
  • Stock Charts

Evaluating Risks for This Covered Call

When considering any investment, first, I consider the risks. Here are the risks that I saw and considered.

Please remember that I am not in any way recommending HP. I don’t give investment advice.

I am simply sharing how I found, evaluated and made a covered call for income to remove some of the mystery around this sensible income strategy for those living off investments. I could easily be wrong about this stock.

You’ll want to pick what works for you within your acceptable risk and goals.

Remember, if you’re invested in stocks, anyway, you already have the risk from being in stocks.

HP could go broke tomorrow as covered below. Always do your own research and invest only in what makes sense for you.

The Dividend Could Be Cut

Risk | Covered Calls for incomeOne risk was that the dividend payouts would be cut. This was happening some in the oil sector.

If the dividend was cut, it would almost certainly lead to a significant drop in the stock.

Since I could see that income from the covered call was around 3% within about 6 weeks, and that the company’s earnings were recovering based on research, I was okay with the risk of a potential dividend cut.

Click here to read my post Is Dividend Investing Worth It? 

The Company Could Go Broke

After researching this stock, I felt comfortable that the company was stable. Given that we only allocate a portion of our net worth to stocks (see above), worst case scenario would not have a meaningful impact on our net worth.

(I use “we” and “I” and “my” and “our” interchangeably in my articles. I am the covered call writer in my family. I like covered calls for income generation because they are simple to understand, easy to implement and provide higher than dividend income from stocks. On the other hand, Larry, my husband, has a professional trading background and he prefers option strategies with hedging.)

The Stock Could Drop in Value and Not Get Exercised

Given the generous 4.9% dividend, I was okay with holding this stock for months or years, especially since this dividend yield was almost 3 times the S&P 500 dividend yield. And the yield was already 2 to 3 times many of the trendy “Dividend Aristocrats” before even considering the initial covered call income.

I like to hope for the best potential outcome but always be okay with the worse potential outcome when I invest to keep risk low.

These were the main steps I took to assess risk for HP, but I look at other risk factors, too.

Buying the Stock for the Covered Call Strategy

I went ahead and bought the stock, HP, on a Friday afternoon, knowing that may not be able to sell the call at the price I wanted until the following week, or possibly later, if the stock dropped, since I frequently sell covered calls near my stock purchase price. (This varies depending on the stock’s trend.)

I normally don’t buy the stock and sell the call option on another day, but here was my thinking in this circumstance.

I was okay with the almost 5% dividend if I got stuck with the stock without writing a call right off since I would get the dividend if I simply held the stock.

Also, since the stock was more than half of its value from a few years earlier when oil was higher, and given, based on research, the earnings recovery that was underway, too, I was okay if I couldn’t sell the call option for a while.

If the dividend payout stays the same, and I still own the stock on the day before the next HP dividend “Ex Date” I will be able to add another 1.24% income to the planned covered call income of about 3%. (It turned out to be 3.3% as explained below.)

How Many Shares of Stocks to Buy for Writing Covered Calls

One option contract represents 100 shares of stock. So, for this covered call trade I bought 200 shares of HP in order to sell 2 call options.

A covered call writer could buy 100 shares and sell 1 call option, or 500 shares and sell 5 call options.

Net Worth Allocation for Writing Covered Calls

As you can see, selling covered calls require high amounts of capital. Before selling covered calls, you’ll want to determine the amount you want allocate to the strategy, and the number of different positions in either stocks or stock ETFs (Exchange Traded Funds).

It is worth repeating here that covered call stocks will drop along with the rest of the market when bear markets occur once or twice every decade.

Clarifying overall risk tolerance and allocating an appropriate amount of net worth toward selling covered calls beforehand is imperative to control risk while building wealth.

As an investor, it’s easy to get caught up in the allure of a single high yielding investment without having an overall wealth plan that defines risk. But investing without such a plan increases risk and can put your life savings in danger.

To see how much a bear stock market will affect your net worth, click here to read my post How Will a Stock Market Crash Affect You and do my simple 5 step Stock Drop Factor.

Selling the Covered Call Option

The Monday after buying HP, I saw it was down a little so I did not sell a call option.

On Tuesday, however, HP was up nicely from Monday’s low.

I was a little happy to see this, to be honest. But in general, I try to be logical about investing instead of letting emotions affect me, so fear and greed don’t affect my judgement.

If I get excited on the upside, I’ll get worried on the downside, so I try to stay neutral and take something of a logical approach with a sprinkling of a Zen Master attitude.

Since HP was up on Tuesday, I sold the call option with a higher strike price than I had anticipated when I initially evaluated this covered call strategy the prior week.

So, I sold a call option with $60 strike on Tuesday instead of the planned $57.50 strike. The option would expire on June 21.

Here is a screenshot from my brokerage account.

covered call investment trades

The covered call income went straight into my brokerage account as it always does. And you get to keep covered call income even if the stock drops.

Covered Call Strategy Change

The overall structure changed from an “at the money” to an “out of the money” covered call strategy as explained below.

When I had bought HP, I planned on selling a $57.50 call option. This is called an “at the money” option since it was right at my purchase price of $57.49.

Instead, given the rise in the price of HP on Tuesday, I chose to sell an “out of the money” call option with a $60 strike.

The covered call income from selling the “out of the money” call option was almost identical to the anticipated 3.2% income anticipated when I evaluated the investment initially.

But, since the stock price rose before selling the call option, with the $60 strike I might capture some profits (capital gain) on the stock sale should HP go to $60 before option expiration.

The daily chart below from my Schwab brokerage account shows when I sold bought the stock and when I sold the call options.

The Math for This Covered Call Strategy

Below is the simple math for this covered call investment with commissions deducted. These numbers, of course, match the screenshot from my brokerage account above.

Stock Purchase Price Per Share                                      $57.49

Call Income Per Option Contract                                      $1.90

Covered Call Return on Investment

Covered Call Income                                                      $1.90/$57.49 = 3.3%

You can check the income yield on this simple covered call calculator my son just added to the site here.

Annualized Return on Investment                              3.3% x 8 = 26.4%

Annualized Covered Call Income

Annualized, this income is 3.3% times 8, or roughly 26.4%, as shown below. I used  a factor of 8 for annualized the return since this was a 6 week covered call investment, and this strategy could optimistically be repeated about 8 times a year, give or take.

This isn’t to suggest that I could do this same trade every month. This does, however, allow a covered call writer to see how much covered call income is when annualized so it can be compared to a typical dividend stock of 1% to 5% for an entire year.

More realistically, I plan on about 1 to 1.5% covered call monthly income, but only during sideways to rising stock markets.

Covered Call Risk Vs Dividend Stock Risk

investment risk | covered call incomeSince roughly the same amount of capital is tied up in covered call stocks vs dividend stocks, comparing the two stock income strategies is a meaningful comparison, especially given the similar risk.

Again, note that the dividend stock has slightly higher risk without selling the covered call to lower the stock cost. And the more call options are sold, the lower the basis becomes on the overall investment.

(Click the link below to watch my video Is Dividend Investing Worth It where I talk more about stock market risk, which relates to covered calls also. Please ignore the goofy image:)


“Out of the money” covered calls are more likely to not be exercised and lead to subsequent call options being sold against the stock.

Click here to read my post Ways to Reduce Investment Risk. 

Limited Upside from Covered Call Strategies

Let’s address the common complaint of limited upside as it relates to covered call income. During the time you own a stock, covered call income is uncertain, but dividends are also uncertain since they can be cut.

Of course, both covered call stocks and dividend stocks can decrease in value.

Click here to read my post How to Know If the Stock Market Will Go Up or Down. 

Yet we can see that covered call income is much higher than simply dividend income.

Why isn’t everyone selling covered calls? What’s the catch?

The trade off is that covered call strategies often have limited upside potential since the stock can get called away (exercised) at the strike price of the call options.

And let’s face it; it’s a little more work to sell covered calls than it is to collect dividends.

But given the income difference between dividend stocks and covered calls the time return on investment is a bargain for stock investors wanting to live off investments.

A major point throughout this article is that if an investor is going to have stock market risk, anyway, it could make sense to sell covered calls to increase income.

This makes sense for me.

In fact, I don’t like to own a stock nowadays that doesn’t offer covered call income at least a few times a year.

What Happens at Options Expiration to HP?

Three things can happen at options expiration on June 21, 2019 regarding my covered call investment in HP:

Possibility #1 – HP goes above $60

Possibilities | covered calls for income In this case, I will probably do nothing.

If I do nothing, everything is automated through my broker. The stock gets sold to the buyer of the call option at the strike price of $60.

Sometimes I buy back the call and sell the stock if I am at my desk on the option expiration day and if I can make a little more money after commissions.

Covered call writers can be more, or less, proactive based on their desired lifestyle, a major element at Retire Certain. This is what makes covered call writing an excellent choice for many stock investors living off investments.

In 2006, for example, I managed a diversified portfolio of covered calls on my laptop while on a family trip to Italy and that was before WiFi was everywhere.

Profit on Stock with Price over $60 on Option Expiration

Stock Sales Price                                                $ 60.00

Less Stock Cost                                                   $ 57.49

Profit on Stock Per Share                        $   2.51

Total Stock Profit and Covered Call Income:

Profit on Stock Per Share                                  $ 2.51

Covered Call Income, $60 Strike                      $ 1.90

Total                                                                  $ 4.41

Total Covered Call ROI (Return on Investment)

Total Covered Call ROI in First 6 Weeks                  $4.41/$57.49 = 7.67%

Annualized Covered Call ROI                                       7.67% x 8 = 61.36%

Possibility #2 – The stock is under $60 at option expiration

In this case, the call option buyer would not want to buy HP since the market price is below $60, the option strike price.

I can either sell HP or keep it at this point. If I keep it, I’ll get dividends of 4.9% a year which is not too bad.

While the stock may decline in value for various reasons, it may also go up. If it goes up, I can sell it for a capital gain or sell another covered call.

Unless the overall stock market or fundamentals change, I will probably keep the stock and just sell another call option when the stock is in a good position to do so.

Note that the price of the stock will determine the amount of money I get from the call option and any potential gain or loss I have from the stock.

For this reason, I will carefully pick the option strike price so I will, ideally, only get called out at a profit or break even on the stock.

Note that even if I get called out of the stock at break even, I still got the 3.3% income from selling call options against the stock.

Managing Covered Calls

Keeping a covered call stock and selling additional call options is called (no pun intended) managing a covered call stock.

Covered call management is simply a part of selling covered calls since all options sold don’t get exercised.

Click here to read my post Living Off Covered Calls with more about how to manage covered calls.

I use stock charts to help me decide how to manage the stock and sell covered calls, round 2 and beyond.

And the overall stock market vs the amount of risk I am willing to take is always a part of the evaluation process.

Remember, if the stock doesn’t get called away, every time I sell a covered call option, my stock cost from in the overall position is lowered.

Other Potential Covered Call Outcomes

Early Exercise of Covered Calls

calculator for covered call incomeThis call option can get exercised early. If it does, everything will happen as in #1 above, but it will happen earlier. This would be good since I could get my capital back sooner from the sale of HP.

My experience has been that covered calls rarely get exercised early except when dividends are involved. Note that European options cannot get exercised early, but American options can.

I Close Out the Covered Call

Should I choose, I can buy back the call option for a profit or a loss at any time before the option expires. If I do, I can also sell the stock.

Since this covered call is in an IRA I cannot be short the call option unless I own the stock.

In other words, I cannot sell the stock before I buy back the call options in my IRA.

For regular brokerage accounts, the amount of risk you want to take, or the approved options trading level will determine if you are in a short call position without owning the underlying stock.

Note that owning the “underlying” stock is what makes the option portion of this trade low risk.

This is why covered call strategies are allowed in IRA’s. They are considered a low risk option strategy.

Buy Back the Option and Sell Another Option

Sometimes I buy back a call option and sell another call option for a later month. Depending on the stock price, I may be able to sell a call option with a higher strike price.

This is called “rolling” in covered call terminology. It allows covered call sellers to make more profit from the sale of the stock since the strike price is higher.

Since options naturally decrease in value due to time decay, or due to a stocks volatility, it is not uncommon for covered call writers to be able to buy back an option for 5 or 10 cents.

The call writer can the sell a higher priced option with the same strike, or possibly even a higher strike, for the following month.

Summary of Covered Call Selling

Covered calls can be an excellent way to generate passive income from stock investments. This is especially true for investors who are invested in stocks anyway.

Again, your big picture wealth plan should first define investment diversification and risk tolerance based on your investment goals, net worth, desired lifestyle cost and the income streams needed to fund that lifestyle.

Thanks for reading my post. Feel free to share it on Facebook or Pinterest with anyone you think may enjoy it.

Camille Gaines

covered calls for income Pinterest imageShare this Pin by hovering over the image and clicking the red P in the upper left corner.

Absolutely nothing in this post should be construed as personal financial advice. 

As of the time of this post, I own Helmerich Payne (HP) and I am short the June 21, 2019 $60 Call Options.

The information on this website is for education only and is not to be construed as personal financial advice.

2 thoughts on “Covered Calls for Income – Example of a Recent Strategy I Did with ROI [Charts]”

  1. I think this post and all the related ones on your blog on covered calls are quite biased and in a way misleading.

    To answer your first question in this post, the reason why most investors don’t engage in call writing on their existing stock is because they don’t want their stock to get called away. Many investors follow a dividend growth strategy, where compounding is key and dividend growth plays a pivotal role. When stocks get called away you impair this compounding effect, as you would have to buy back the shares at increasingly higher prices (assuming a bull market and rising stock prices).

    You would do your readers more service if you tell the full story and not just some of the (temporary) benefits of call writing…

    1. You’re right; A lot of investors do follow a dividend growth strategy. There are several covered call strategies depending on the call writer’s goals. Out of the money calls would of course lessen the likelihood of the stocks being called which may be the goal of someone wanting to keep their stocks for long term dividend compounding, especially in a taxable account. This would have to assume that someone has been in stock positions for many years and not everyone has that situation or wants to do that.
      Selling near the money calls on newly bought shares is a different covered call strategy from what you reference.
      Thanks for your comment but I don’t really like the term “most people” since everyone has their own goals and situation.
      I tend to prefer math and data, not quote what “most people do” since what “most people do” is not what investing legends like John Templeton, Peter Lynch, Ray Dalio, Warren Buffett, etc do to become wealthy.
      Also, a conservative covered call income yield is 1% a month, or 6% to 18% a year depending on how active an investor is in selling covered calls and the overall market. Compare this to a 3% dividend yield. It sounds like you may not realize you can also time covered calls so you capture the 3% dividend, too, although my experience has been that often the options get exercised just ahead of the dividend by “dividend snatchers”:). This is okay since the call income is much higher than the dividend income and I know it may happen when I sell the covered call. Many sophisticated financial advisors and funds use covered calls to increase income from stocks.
      The compounding of dividends over decades can work well. But covered calls add more income and decrease risk of owning stocks since they lower the stock’s basis each time a call is sold.
      There is no one strategy for everyone and everyone must do what works best for them based on their risk tolerance and goals. Thanks again for your comment.

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