
Covered calls are a great strategy to add to any portfolio, particularly in this era of low yields. Covered calls can offer enhanced yield from stock holdings, in some case, that can be a significant increase.
To trade a covered call we need to own (or buy) 100 shares of a stock and then sell a call option against that stock position.
The goal is to generate income from the stock holding in addition to any dividends. The premium received from selling the call also covers a small decline in the stock price. However, the trade off is that stock gains are limited above the call option strike price.
High volatility stocks have the highest return potential with covered calls, but they also have the highest risk of an adverse price movement. It’s all about finding a strategy that fits the investors risk tolerance.
Let’s look at a few examples using Barchart’s Covered Call Screener.
This first example shows the results of the screener with the default parameters selected.

This result returns some stocks with very low market capitalization and, while the returns look great, the risks can also be very high.
Let’s add a filter for Market Cap over 60 billion and 60-month Beta below 1.00. We’ll also change the Moneyness filter from -10% to 0%.

Now, we’re seeing some more mainstream names such as INTC, BABA, MSFT, SBUX and JD.
INTC Covered Call Example
Let’s evaluate the fifth line item, an INTC covered call. Buying 100 shares of INTC would cost $3,652. The September 40 strike call option was trading yesterday around $0.33, generating $33 in premium per contract for covered call sellers.
Selling the call option generates an income of 0.91% in 43 days, equaling around 7.74% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 40?
If INTC closes above 40 on the expiration date, the shares will be called away at 40, leaving the trader with a total profit of $381 (gain on the shares plus the $33 option premium received).
That equates to an 11.5% return, which is 95.7% on an annualized basis.
INTC is currently followed by 21 analysts with 1 Strong Buy ratings, 1 Moderate Buy rating, 13 Hold ratings, 1 Moderate Sell and 5 Strong Sell ratings. The Barchart Technical Opinion rating is an 100% Sell with an average short term outlook on maintaining the current direction.
The current IV Percentile is 38% which means that the current level of implied volatility is higher than 38% of all occurrences in the last 12 months.
Selling Calls Closer To The Stock Price
The previous example shows a very nice potential return, but required the stock to rally significantly to achieve the full return. Let’s adjust the screener slightly so that we can find more income focused covered calls. We can do this by changing the Moneyness filter to be -5% to 0%. This will give us covered calls that are closer to at-the-money. This means they will have less capital gain potential and focus mainly on the income portion of the trade.

Here are the results:

Here we see the annualized returns are lower because the covered calls are closer to the money which means less capital gain potential. However, as you will see the return from the sold call will be higher if the stock stays flat.
Let’s use INTC again as our example:
The August 37.50 strike call option was trading yesterday around $0.38, generating $38 in premium per contract for covered call sellers.
Selling the call option generates an income of 1.05% in 15 days, equaling around 25.59% annualized.
If the stock rises above 37.50 at expiry, the total return would be 4.8% or 108.9% annualized.
Here is another example using Microsoft. Buying 100 shares of MSFT would cost around $28,247. Selling the 295 strike call with a September expiration date would generate around $430 in covered call premium.
The total capital at risk would be the $28,247 to buy the 100 shares less the premium received of $430. That equals $27,817 capital at risk.
If we take 430 divided by 27,817 that gives us a potential return of 1.55%. On an annualized basis that is 13.12%.
If MSFT closes above 295 on September 16, the shares would be called away and the total return would be equal to the gain on the stock ($1,253) plus the option premium received ($430) for a total gain of $1683 or 6.05%.
That is around 51.36% annualized.
The Barchart Technical Opinion rating is a 24% Sell with a weakening short term signal outlook on maintaining the current direction.
Traders may prefer to add a parameter to the screener to find only stock with buy ratings.
The current IV Percentile is 37% which means that the current level of implied volatility is higher than 37% of all occurrences in the last 12 months.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, August 3, 2022.
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