Why Your Covered Call Portfolio Isn’t Working

Covered calls are one of my favorite strategies for generating income, but I see far too many investors walk away frustrated because the results aren’t what they expected. The truth is, covered calls work — but only if you approach them with the right mindset, rules, and discipline.

Here’s why your covered call portfolio might be underperforming, and how I structure mine for long-term success.

1. You’re Not Diversifying Enough

The number one mistake I see is a lack of diversification. When you sell covered calls, you have to accept that sometimes a stock you own will drop 20% or 30%. The only way to protect yourself from that reality is to diversify the risk away.

In my portfolios, the aim is that no single position is more than 7% of the total. That way, a 20% drop in one name is only about a 1% hit overall. I know that’s tough for smaller accounts, but it’s non-negotiable if you want this strategy to work over the long haul.

2. You’re Emotionally Attached to a Stock

If you fall in love with a stock, you’re setting yourself up for trouble. I don’t care if you’re up 250% in two years and you’ve collected 15% annualized cash flow from calls — the second the premium isn’t attractive, it’s time to move on.

Pay the tax. Take the loss. Miss the next 100% in capital gains if you have to. There’s always a reason premiums have dried up, and if you can’t sell because you’re emotionally attached, covered calls probably aren’t for you.

3. You’re Treating Covered Calls Like a “Set-and-Forget” Strategy

Covered calls are the opposite of set-and-forget. My bread and butter is one-week trades. Occasionally I’ll push it to two weeks around holidays, but a month is a long time in the investment world.

There are investors who stick to monthly calls on dividend payers, and that’s fine for a slower, less volatile approach — but if you want to maximize covered call performance, you need to be active.

4. You’re Not Separating Option Cash Flow From Capital Gains

Here’s a mindset shift: I never lump option premium into my capital gains or losses.

Call premium is a short-term gain for tax purposes, but I treat it as “option cash flow” — a separate category. When we sell-to-open, we’re happy with the trade from the start. If it expires, we keep the cash flow. If it gets called away, we say goodbye to the stock and move on.

5. You’re Not Following the Non-Negotiables

If your covered call portfolio isn’t working, here are my hard rules:

1. Never own fewer than 15 stocks.
2. Never sell calls on a stock that doesn’t generate at least 12% annualized cash flow.
3. Never sell calls at the money — go as far out-of-the-money as you can while maintaining that 12% yield.

And if you find a trade that’s 15% out of the money with a 24% annualized yield? Perfect — but that trade still only gets 7% of the portfolio max.

Covered calls are a fantastic tool when used the right way. They’re not broken, and you don’t need to abandon the strategy. You just need to run it with discipline, match it to the market you’re in, and never let emotion dictate your decisions.