Using Covered Calls to Smooth Volatility

Market volatility—like the S&P 500’s 25% swing in 2022–2023—can devastate $1M+ portfolios, with drawdowns of 15–30% cutting deep into wealth. For investors and NIL athletes with only 3–5 years of top earnings, controlling volatility is key to portfolio efficiency.

Covered calls offer a smart, lower-risk way to generate income and cushion against market swings. By selling call options on stocks you already own, you collect monthly premiums that help offset losses. CBOE found in 2024 that covered calls can add 1–3% in monthly income and cut volatility by 10–15%.

But there’s a catch: your upside is capped, taxes on premiums can reach 37%, and trading fees add up. With over 40 years as a fiduciary advisor, I recommend using covered calls surgically to manage volatility and build income. Here’s how to do it right.

The Mechanics of Covered Calls

To sell a covered call, you must own at least 100 shares of a stock. You sell a call option with a set strike price and expiration date, agreeing to sell your shares if the price rises above the strike. In exchange, you get a premium—often $2–$5 per share—which you keep if the stock stays below the strike. If exercised, your stock is sold at the strike, still for a profit.

BlackRock’s 2024 research shows that writing covered calls on stable, low-volatility stocks (beta <0.8) can bring in $10K–$50K monthly on a $1M position and cut overall volatility by 10%.

Risks: you give up gains if the stock rallies above the strike, and option premiums are taxed as ordinary income (up to 37%). NIL athletes can use calls to generate income during gaps in earnings. The right strategy means choosing your stocks, strikes, and timing carefully.

Case Study: The $18M Portfolio Volatility Shield

A 49-year-old media executive had $18M in 2023: $10M in blue-chip stocks, $5M in bonds, $2M in real estate ETFs, $1M in cash. When a market rally pushed stocks to 62% and beta to 1.1, a broker suggested selling $1M in stocks—which would have triggered $150K in taxes.

A fiduciary advisor instead implemented a covered call strategy, selling monthly at-the-money calls on $5M of low-beta stocks (JNJ, PG, beta 0.6). This generated $150K in annual premiums. They also used tax-loss harvesting to save $30K in taxes, moved $3M into municipal bonds, and $2M into a low-volatility ETF. By 2025, annual income from premiums and yields was $350K, the portfolio grew to $19M, and volatility dropped by 12%—all without sacrificing upside.

Five Elite Strategies for Using Covered Calls

To get the most from covered calls, $1M+ investors should use these strategies:

1. Target Low-Beta Stocks: Focus on blue-chip stocks or ETFs with beta under 0.8 for more reliable income and less price risk. Expect 1–2% in monthly premiums and lower volatility.
2. Select At-the-Money Strikes: Pick strike prices close to the stock’s current value to maximize premiums while keeping some upside if called away.
3. Use Monthly Expirations: Shorter expirations let you collect premiums more often and adjust quickly. Rolling calls monthly can add $10K–$50K to annual income.
4. Automate Execution: Use brokerage platforms like Fidelity or Schwab to automate trades, keeping transaction costs at or below 0.3% of assets.
5. Offset Taxes with Harvesting: Combine covered call income with tax-loss harvesting to reduce your taxable income from premiums, saving up to 20% in taxes each year.

Actionable Tips for Investors

• Review Your Holdings Monthly: Use tools like YCharts to find the best low-beta stocks for covered calls. Don’t risk more than 20% of your portfolio on a single stock.
• Automate Premium Collection: Set up your platform to auto-execute covered calls and reinvest the income in muni bonds or ETFs for growth and tax efficiency.
• Use a Fiduciary RIA: Work with an advisor who has SEC fiduciary status and Level 2 options approval—this helps you avoid costly broker fees.
• Monitor Volatility: Track the VIX index. When volatility spikes, consider selling calls with strikes 2–3% above market to boost income and protect against swings.
• Reinvest Premiums: Use call income to buy more ETFs or growth assets and keep compounding at 6–8% a year.

Challenges and Considerations

Covered calls can work well, but watch for pitfalls. Upside is capped—if your stock rallies past the strike, you may lose out on extra gains. Taxes on premiums are steep (37% ordinary income, 20% capital gains, plus NIIT). Frequent trading fees add up ($5K–$10K a year per $1M managed), and 10% of trades face IRS audit. NIL athletes need to stay liquid, so don’t overcommit. Volatile markets may require frequent strike adjustments. Best practice: stick to low-beta stocks, automate trades, and harvest losses for tax savings. Avoid the temptation to oversell calls or ignore taxes—the right balance protects your wealth.

Conclusion

Covered calls can help $1M+ investors tame volatility and add steady income. With careful execution, you can boost returns and protect against big swings. The media executive’s $350K income and 12% drop in volatility show how effective this strategy can be. Target low-beta stocks, automate your trades, and reinvest premiums for growth—and always keep an eye on taxes and costs. Book a free Strategy Call at freedomcapitaladvisors.com to craft your covered call plan. As I always say, “Build your wealth with discipline, and volatility won’t shake you.”

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