Every few months someone asks me what my "best trade" was this year, expecting a story about a stock that doubled. I never have a good answer, because the trades I'm proudest of are the ones nobody would want to hear about at a dinner party: selling covered calls against consumer staples stocks I already planned to hold for a decade.
The mechanics, quickly
A covered call means I own at least 100 shares of a stock, and I sell someone else the right to buy those shares from me at a set price (the strike) before a set date (expiration). In exchange, I collect a premium immediately, in cash, no matter what happens next. If the stock stays below the strike, I keep the shares and the premium. If it rises above the strike, my shares get "called away" — sold at the strike price — and I still keep the premium on top of the gain up to that price.
I mostly do this on names like KO, PG, and JNJ — companies I'd be comfortable holding through a recession, with options markets liquid enough that the bid-ask spread doesn't eat the premium. These are not stocks I expect to triple. That's exactly the point.
Why boring is the feature, not the bug
Covered calls work best on stocks with low-to-moderate volatility that you're genuinely willing to sell at the strike price. If I write a call on a stock I secretly hope skyrockets, I've set myself up to be annoyed when it does. On a stock I bought for slow, dividend-supported compounding, having it called away at a modest profit is a fine outcome, not a tragedy.
The strategy doesn't reward being right about direction. It rewards being honest about what you actually want from a position.
That honesty is the hard part. Most investors who try covered calls once and quit did so because they picked a volatile growth stock, watched it run past their strike, and felt like they'd left money on the table. Technically true — but they'd also collected a premium for taking on that exact, disclosed risk. The frustration is a sign the stock was the wrong candidate, not that the strategy failed.
How I pick a strike
I generally sell calls somewhere between 5% and 10% above the current price, with 30 to 45 days until expiration — a range that, in my experience, balances a meaningful premium against a reasonable chance the stock doesn't just run past it. I also check the dividend calendar; a covered call sold across an ex-dividend date can occasionally trigger early assignment, which is a paperwork annoyance more than a financial disaster.
- Liquidity first: tight bid-ask spreads matter more than the "perfect" strike.
- Willingness to sell: pick a strike you'd be happy selling at, not one you're hoping is never reached.
- Position size: I only write calls on shares I could hold through a 30% drawdown without flinching.
A simple illustration
Say I hold 100 shares of a stock trading around $60, and I sell a call at a $65 strike, 45 days out, for roughly $1.20 per share in premium — $120 total. If the stock finishes below $65, I keep the shares and the $120, which is a small but real return on top of whatever the stock itself does. If it finishes above $65, my shares sell at $65, and I still keep the $120 — a combined gain from both the share price appreciation and the premium. Neither outcome is a loss relative to simply holding the shares uncovered, assuming I was genuinely fine selling at $65.
These numbers are illustrative, not a live trade — actual premiums move constantly with volatility, time to expiration, and interest rates, so I'd encourage anyone trying this to look at a real options chain rather than treating any example as a promise.
What I'd tell a beginner
Start with one position, one contract, on a stock you already own and already understand. Track what actually happens versus what you expected. The first few times, you'll likely pick strikes too close to the current price out of greed for premium — I certainly did. The lesson usually costs less than you'd think, and it sticks better than reading about it ever will.