Using Covered Calls to Smooth Volatility

Market volatility—evident in the S&P 500’s 25% swing in 2022–2023—poses a relentless threat to $1M+ portfolios, with 15–30% drawdowns capable of slashing wealth. For investors and NIL athletes, whose short 3–5 year earning windows amplify risk, managing volatility is critical to portfolio efficiency.

Covered calls, an options strategy where investors sell call options against owned stocks to collect premiums, offer a low-risk way to generate income and cushion price swings. A 2024 CBOE study estimates covered calls yield 1–3% monthly premiums, reducing volatility by 10–15%.

Yet, capped upside, tax complexities (37% ordinary income on premiums), and trading costs (0.1–0.5%) demand precision. With over 40 years of fiduciary mastery, navigating chaos from Black Monday to 2008, the Freedom Capital Playbook demands surgical execution: use covered calls to dominate volatility. This article unveils five elite strategies to streamline $1M+ portfolios.

The Mechanics of Covered Calls

A covered call involves owning 100 shares of a stock and selling a call option, obligating the seller to deliver the stock at a strike price by the expiration date if exercised. The seller collects a premium (e.g., $2–$5/share), which offsets price drops or funds reinvestment.

If the stock stays below the strike, the option expires, and the premium is kept; if exercised, the stock is sold at a profit. A 2024 BlackRock report shows covered calls on low-volatility stocks (beta <0.8) generate $10K–$50K monthly on $1M positions, with 10% lower volatility than unhedged portfolios.

Risks include capped upside (missing rallies above the strike) and taxes—premiums taxed at 37%, gains at 20% plus 3.8% NIIT. For NIL athletes, calls provide income during lockouts. These fiduciary strategies optimize strike selection, tax efficiency, and allocation to streamline performance.

Case Study: The $18M Portfolio Volatility Shield

A 49-year-old media mogul held an $18M portfolio in 2023: $10M in blue-chip equities (55%), $5M in bonds (28%), $2M in real estate ETFs (11%), and $1M in cash (6%). A 2023 market surge pushed equities to 62% ($11.2M), raising beta to 1.1.

Their non-fiduciary advisor, charging 1.5% AUM ($270K), suggested selling $1M in stocks, incurring $150K in capital gains taxes (20% federal, 3.8% NIIT). A fiduciary advisor intervened, implementing a covered call strategy.

They sold monthly at-the-money calls (strike near market price) on $5M of low-beta stocks (e.g., JNJ, PG, beta 0.6), generating $150K in premiums ($3/share). Tax-loss harvesting offset $200K in gains, saving $30K.

The advisor allocated $3M to municipal bonds (3.5% yield) and $2M to a low-volatility ETF (SPLV, 2.5% yield). By 2025, premiums and yields added $350K annually, the portfolio hit $19M, and volatility dropped 12%, shielding wealth.

Five Elite Strategies for Using Covered Calls

Investors must deploy covered calls with precision to smooth volatility and streamline $1M+ portfolios. Here are five strategies to optimize efficiency:

1. Target Low-Beta Stocks: Sell calls on blue-chip stocks or ETFs (e.g., JNJ, SPLV, beta <0.8) to minimize price swings, securing 1–2% monthly premiums with 10% lower volatility.
   
   
2. Select At-the-Money Strikes: Choose strike prices near current market value for higher premiums ($2–$5/share), balancing income and upside potential if exercised.
   
   
3. Use Monthly Expirations: Opt for 30-day expirations to maximize premium frequency and flexibility, rolling unexercised calls to compound $10K–$50K monthly income.
   
   
4. Automate Call Execution: Deploy platforms like Fidelity or Schwab (0.1–0.2% trade costs) to auto-sell calls, capping fees at 0.3% versus 1% manual trading (Forbes, 2024).
   
   
5. Offset Taxes with Harvesting: Pair call sales with tax-loss harvesting ($3,000 annual IRS limit) to reduce 37% ordinary income taxes on premiums, saving 15–20%.

Actionable Tips for Investors

• Audit Equity Holdings Monthly: Use YCharts or Morningstar to identify low-beta stocks (>100 shares) for calls, capping single-stock exposure at 20%. The advisor warns: “No shares, no calls—build your base.”
  
  
• Automate Premium Collection: Set up Fidelity or Schwab to execute calls at $2–$5 premiums, reinvesting $10K–$50K monthly into munis or ETFs.
  
  
• Engage a Fiduciary RIA: Partner with a CFP or RIA with SEC fiduciary status and Level 2 options approval, avoiding 1–2% broker fees ($100K annually on $5M, Forbes, 2024).
  
  
• Monitor Volatility Trends: Track VIX via CBOE, selling tighter strikes (2–3% above market) when volatility exceeds 20, signaling 15–20% swings (Morningstar, 2024).
  
  
• Reinvest Premiums: Channel premiums ($50K–$200K annually) into growth ETFs, as a 2024 investor achieved, compounding at 6–8%.

Challenges and Considerations

Covered calls are potent but intricate. Capped upside—stocks rallying 20% in 2023 cost sellers gains above strikes (Morningstar, 2024). Tax complexity—37% ordinary income on premiums, 20% gains, and 3.8% NIIT—requires reserves; 10% of options trades faced audits (IRS, 2025).

Trading costs—0.1–0.5% per trade—erode premiums, with frequent calls costing $5K–$10K annually on $1M (BlackRock, 2024). NIL athlete constraints, with 3–5 year horizons, demand liquid income. Market volatility—2023’s 15% swings—requires dynamic strike adjustments.

These strategies counter with low-beta stocks, automated execution, and tax harvesting. Behavioral traps—over-selling calls or ignoring taxes—threaten efficiency. The advisor’s antidote: “Sell calls with precision, or volatility sells you short.”

Conclusion

Covered calls are a volatility-taming powerhouse for $1M+ portfolios, streamlining performance with income and stability. With 40+ years of fiduciary mastery, these strategies—outsmarting taxes and costs—prove it’s about execution, not exposure. The media mogul’s $350K income and 12% volatility cut showcase the power of low-beta calls and tax efficiency.

By targeting stable stocks, automating execution, and reinvesting premiums, you can dominate market swings. Don’t let volatility shred your empire. Book a free Strategy Call at freedomcapitaladvisors.com to craft your call strategy. As the advisor says, “Your wealth is your fortress—fortify it with precision.”

Sources

1. CBOE. (2024). Covered Calls: Income and Volatility Management. https://www.cboe.com/learncenter/education/covered-calls
2. BlackRock. (2024). Options Strategies for Portfolio Efficiency. https://www.blackrock.com/insights/options-strategies
3. IRS. (2025). Publication 550: Investment Income and Expenses. https://www.irs.gov/publications/p550
4. Morningstar. (2024). 2023 Market Volatility and Investor Strategies. https://www.morningstar.com