Investment Idea of the Week: Covered Calls Can Make You Passive Income

Many investors, especially executives, founders, or long-time enthusiasts of a particular company, find themselves in a familiar situation. Over time, they build a large position in a stock they know well and believe in. The investment may have appreciated significantly, and they remain constructive on the long-term outlook.

However, they may also recognize that markets move in cycles, and not every month delivers meaningful price appreciation.

This is where a covered call strategy can be a powerful and often overlooked tool.

What Is a Covered Call?

In simple terms, a covered call involves owning shares of a stock and selling call options against those shares. By selling these options, the investor collects a premium in cash. That premium is theirs to keep regardless of what happens to the stock, provided the position is structured correctly.

The trade-off is that if the stock rises above a certain level (the strike price), some of the upside may be capped or shares may be sold at that agreed price. For investors who are moderately bullish, or simply willing to monetize part of their upside in exchange for consistent income, this can be an attractive exchange.

How the Strategy Generates Income

A useful way to think about covered calls is this: stocks do not rise every month, but option premiums can be collected regularly.

Investors are effectively getting paid by the market for agreeing to sell shares at a higher price in the future. If the stock stays below that level, they keep both the shares and the premium. If the stock rises significantly, they still profit, but their gains are capped above the strike price.

When run systematically, this process can generate a steady stream of income that complements dividends and capital gains.

Who Might Benefit From This Strategy?

Covered calls are particularly well suited to:

• Executives or professionals with concentrated equity positions

• Long-term investors with sizable holdings in a single stock

• Investors who are neutral to moderately bullish rather than aggressively bullish

• Investors seeking portfolio income without selling core holdings

In many cases, investors do not want to exit their positions but would welcome the ability to earn income from shares that might otherwise sit idle during sideways markets.

What Objectives Can Covered Calls Achieve?

A properly structured covered call program can help investors:

• Generate recurring income

• Reduce portfolio volatility

• Enhance total return in flat or moderately rising markets

• Monetize concentrated positions gradually

• Improve portfolio cash flow without liquidating core assets

It is important to note that covered calls are not designed to maximize upside in strong bull markets. Rather, they are designed to improve the consistency of returns over time.

When Does It Make Sense to Hire a Professional?

While selling a single call option is straightforward, managing a systematic covered call program becomes more complex as position size increases.

In practice, investors often consider professional management when:

• Positions exceed approximately USD $500,000 to $1,000,000

• Multiple expiries and strike levels are used

• Trading windows, liquidity, or execution quality matter

At larger sizes, the difference between good and poor execution can materially impact results. Professionals typically implement structured rules, stagger positions, and manage timing carefully to balance income generation with long-term objectives.

What Returns Can Investors Reasonably Expect?

Returns vary significantly depending on the stock’s volatility and market conditions, but a reasonable expectation for many covered call programs is:

• Monthly income of approximately 1% to 4% of the value of overwritten shares in volatile stocks

• Lower but more stable income for lower-volatility stocks

Some months may generate less, and occasionally a rally may result in shares being called away at a profit. Over time, however, the goal is to produce consistent income rather than to maximize any single month’s result.

Typical Fee Structures

Investors often ask what it costs to have a covered call strategy professionally managed.

A common structure in the industry is a performance-based fee, typically in the range of:

• 10% to 20% of net premiums collected

This approach aligns incentives: the manager earns only when income is generated.

More complex mandates may use hybrid structures, but performance-based fees remain the most common and transparent.

Why Systematic Execution Matters

One of the key differences between casual option selling and a professional program is discipline.

A systematic approach typically includes:

• Defined overwrite percentages

• Structured strike selection

• Scheduled reviews and rolling of positions

• Risk management rules

• Documentation and reporting

Beyond this, experienced discretion can add value; such as recognizing periods when premiums are unusually attractive, or when markets are trending strongly and it may be prudent to reduce overwrite levels.

The difference is not in predicting markets perfectly, but in managing the strategy consistently over time.

Final Thoughts

Covered calls are not a universal solution, but for investors with sizable equity positions, they can be a highly effective way to turn dormant holdings into a source of recurring income while maintaining exposure to long-term growth.

Like any strategy, they work best when tailored to the investor’s objectives, risk tolerance, and tax considerations.

If you are holding a concentrated equity position or are interested in learning whether a covered call strategy may be appropriate for your portfolio, I would be happy to discuss your situation in a discovery meeting.

You can reach out through WealthwithDaniel.com to schedule a conversation.

Author:

Daniel Tittil, CFA, CAIA, MSc.

Lead Advisor at WealthwithDaniel.com