7 Common Mistakes with Covered Calls & How to Fix Them
Covered calls are a powerful way to generate consistent income from the stock market, but many investors struggle with them due to common mistakes. While covered calls can provide 2%–4% monthly returns, they require a proper system to maximize profits and minimize risk.
In this blog, we will discuss seven reasons why traders struggle with covered calls, how to fix these mistakes, and how to implement a winning covered call strategy that generates reliable income.
Why Covered Calls Can Be Profitable
Covered calls offer several advantages:
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Consistent Income – Selling call options generates regular premium income.
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Downside Protection – The premium collected helps offset small stock declines.
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Lower Portfolio Volatility – Covered calls reduce risk compared to just holding stocks.
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Can Be Used in Any Market Condition – You can adjust strike prices to fit bullish, bearish, or neutral markets.
However, most traders make critical mistakes that limit their success with this strategy.
7 Mistakes Traders Make with Covered Calls
- Lack of Understanding
Many traders misunderstand how covered calls work. They assume it's as simple as:
- Buying a stock
- Selling a call option
- Collecting premium
However, there’s much more to covered calls than just collecting premiums. You need to:
β Pick the right stock
β Trade in the right market conditions
β Select the right strike price
β Adjust your position if needed
Fix: Learn a structured system with clear rules for managing trades.
- Setting Unrealistic Strike Prices
Many traders set strike prices too far out of the money, hoping to maximize profit. This mistake leads to:
π« Low premium income
π« No downside protection if the stock drops
π« Missed opportunities for consistent cash flow
Example:
A trader believes MicroStrategy (MSTR) will skyrocket and sells a call option far out of the money. Instead, the stock drops, and they earn very little income while taking on unnecessary risk.
Fix: Use a balanced approach to strike prices:
β In-the-money calls → More downside protection
β At-the-money calls → Highest income potential
β Out-of-the-money calls → Lower income, but more upside
- Ignoring Market Trends
Markets fluctuate, and covered calls must be adjusted based on market conditions.
π In a bear market – Traders should sell deeper in-the-money calls for more protection.
π In a bull market – Traders can sell out-of-the-money calls to capture upside.
Most traders use the same strategy in all market conditions, leading to poor results.
Fix: Analyze market trends and adjust your covered call strategy accordingly.
- Poor Risk Management
Many traders fail to manage risk properly, which results in:
π« Holding onto losing trades too long
π« Doubling down on bad positions
π« Letting emotions dictate decisions
Solution: Implement a circuit breaker – a predefined stop-loss level where you exit a trade to protect capital.
Fix: Set clear exit rules before entering a trade.
β If the stock drops below a key level, close the position.
β If market conditions turn against you, adjust your covered call strategy.
- Chasing High Premiums
Many traders only focus on high premium stocks, which often have high risk and volatility.
π Example:
A stock offers 8% weekly premiums, but it’s extremely volatile. A trader enters a covered call but wakes up the next morning to a 20% stock drop.
Fix: Balance premium income with stock stability.
β Avoid stocks with extreme volatility
β Choose stable, high-quality stocks with moderate premiums
β Prioritize long-term income generation over short-term gains
- Fear of Assignment
Many traders fear their stock getting assigned if it goes above their strike price.
Truth: If a stock is assigned, it means:
β You made a profit on the stock
β You collected the premium income
β You can reinvest and repeat the process
Stock assignment is NOT a bad thing!
Fix: Stop fearing assignment – instead, see it as a successful trade execution.
- Making Emotional Decisions
When stocks drop, many traders panic and:
π« Sell at the worst time
π« Abandon their strategy
π« Trade based on fear instead of logic
Emotional trading destroys profits. Instead, follow a proven system with:
β Clear entry and exit rules
β Predefined risk management
β A focus on income, not stock price movement
Fix: Create a trading plan and stick to it, even when emotions run high.
How to Build a Profitable Covered Call Strategy
To succeed with covered calls, follow these four cornerstones:
- Pick the Right Stock
β Choose stable, high-quality stocks
β Avoid high-volatility stocks that can drop suddenly
- Trade in the Right Market
β In bull markets → Use out-of-the-money calls
β In bear markets → Use in-the-money calls
- Enter at the Right Spot on the Chart
β Use technical indicators to determine entry points
β Avoid entering trades right before a big stock drop
- Squeeze the Juice (Collect Maximum Premium)
β Find the right balance between premium and risk
β Don’t chase high premiums without considering stock stability
Life-Improving Tips for Smarter Trading
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Be Patient – The market moves in cycles. Focus on long-term income, not short-term fluctuations.
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Stay Consistent – A structured system beats emotional trading. Stick to your strategy.
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Diversify Your Positions – Don’t rely on a single stock for covered calls. Spread your risk.
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Always Keep Learning – The market evolves. Keep improving your technical and fundamental analysis skills.
Frequently Asked Questions (FAQs)
πΉ Can I lose money with covered calls?
Yes, covered calls don’t prevent stock declines. That’s why stock selection and risk management are key.
πΉ What happens if the stock rises above my strike price?
Your shares may be assigned, but you still keep the premium and profit from the stock increase.
πΉ Are covered calls good for beginners?
Yes, but only with proper education. It’s important to learn strike selection, risk management, and adjustments.
πΉ How often should I sell covered calls?
It depends on market conditions. Many traders sell weekly or monthly calls to maximize income.
πΉ What’s the best stock for covered calls?
Look for stable, liquid stocks with moderate volatility and solid fundamentals.
Call to action
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Subscribe to Mark Yegge’s YouTube Channel for expert trading tips.
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Join the Insider Tips Newsletter for real-time market updates.
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Start using a structured covered call strategy and turn your portfolio into an income machine!
Trade smarter, not harder—master covered calls today!
Conclusion: Master Covered Calls for Reliable Income
Covered calls are one of the best strategies for generating consistent stock market income, but they require a solid system. By avoiding common mistakes and following a structured approach, you can:
β Generate 2%–4% monthly income
β Reduce portfolio volatility
β Profit in any market condition
