In a bear market, stock values plunge—but savvy investors can still find ways to generate income. One powerful tactic is writing covered calls—selling call options on stocks you already own. This strategy offers downside cushion, premium income, and a bit of control, even when markets turn grim.
1. What Are Covered Calls?
A covered call involves:
- Owning at least 100 shares of a stock or ETF
- Selling a call option against that position
- Collecting the option premium—your immediate income
How it delivers value:
- If stock stays below strike → you keep the premium and your shares
- If stock rises above strike → shares may get called away at strike price; you still keep the premium
Covered calls offer limited downside protection (equal to premium) and cap your upside potential.
2. Why Use Covered Calls in Bear Markets?
A. Buffers Downside Risk
Options premiums tend to be higher in volatile bear markets, providing more cushion.
B. Income When Prices Stall or Decline
Even if stocks fall, premiums can offset some losses—entirely positive when passive shareholders would see zero return.
C. Stay Invested, Stay Engaged
Rather than selling out completely, you earn income while preserving upside potential if markets rebound.
3. Risks to Know
- Capped upside: No benefit if markets surge
- Full downside exposure: Losses beyond your premium if the stock drops
- Assignment risk: Especially likely if stock rallies near strike price
- Complexity: Needs active monitoring and expiration management —not “set-and-forget”
4. Smart Execution: 4 Key Rules in Bear Markets
Piranha Profits offers advice on maximizing covered calls in downtrends:
- Pick strong, fundamentally solid stocks with reliable earnings and cash flow
- Use in-the-money (ITM) covered calls for extra downside buffer
- Add protection with put options (collar strategy) to limit losses if markets crash
- Stay patient—avoid constant rolling unless markets are choppy; sideline during sharp declines
5. Strategy in Action: Common Approaches
Covered Call with In‑The‑Money Strike
Sell a strike slightly below your purchase price—for example, buying at $150, selling a $145 call. You earn premium plus some downside protection.
Collar: Covered Call + Protective Put
Add a long put option for downside insurance. Income from the call can offset part of the put’s cost, keeping you protected.
Covered Call ETFs & Funds
Funds like ETFs (e.g., XYLD, QYLD) write covered calls for you—delivering consistent monthly income and reduced volatility in bear periods.
6. Real-World Examples
- Newmont Corp (NEM) – During gold sector volatility, writing a covered call on 100 shares at a $60 strike earned ~6.9% premium in 3 months (~26% annualized).
- Kimberly-Clark (KMB) – A $145 call sale on a ~$143 stock fetched $3.55 in premium (2.1% in six weeks—~16.5% annualized), softening emotional stress even if stock fell.
- SoFi Technologies (SOFI) – In a bearish trend, a $15 strike call for September garnered $120 premium (~9.8% over four months; ~31.5% annualized).
7. Implementing a Covered-Call Strategy—Step by Step
- Stock Selection: Choose strong, dividend-paying, low-debt companies.
- Determine Strike & Expiry: Favor 45–60-day expiry and 7–10% out-of-the-money strikes.
- Sell the Call: Write one contract per 100 shares.
- Manage Position:
- Expiration: let it expire, roll, or buy back.
- Assignment: decide whether to let shares be called away.
- Consider a protecting put if market drops sharply.
- Expiration: let it expire, roll, or buy back.
- Repeat or Adjust: If option expires worthless, sell another. In sharp downturns, pause or shift strategy .
8. Watch-Outs & Tips
- Income vs Growth Trade-off: As ProShares notes, traditional monthly covered calls lag the market by half to one-third over time.
- Margins and NAV drag: Leveraging covered call ETFs carries risks in falling markets.
- Taxes: Premiums are treated as short-term income—be tax-aware .
9. Pros & Cons at a Glance
| Pros | Cons |
| Generate income in flat/down markets | Capped upside if stock recovers sharply |
| Partial downside buffer from premiums | Full downside vulnerability beyond premiums |
| Engage without selling shares | In-the-money strikes limit growth further |
| ETFs provide diversification & ease | Performance drag vs outright equity |
10. Who Should Consider Covered Calls?
- Moderately long-term investors expecting mild rebound
- Retirees or income-seeking investors who value monthly cash
- Buy-and-hold investors in quality stocks aiming to enhance returns
- Active traders comfortable with options and ready to adjust positions dynamically
Not ideal for aggressive growth seekers or those without understanding of options.
11. 2025 Bear Market Insights
- Covered call ETFs showed premium stability even as volatility fell in mid-2025.
- In 2025, covered calls work well alongside protective puts and quality stock picks.
- Daily call writing strategies (like ProShares daily covered calls) aim to balance income with some market capture .
12. Final Takeaway
Covered calls aren’t a cure-all, but in correctly chosen stocks and structured setups, they offer real value during bear markets. The key is discipline—patience, quality stock selection, protective layers, and smart expiry choices.
Source : thepumumedia.com