Hey investor friend, Andy Tanner here. Allow me to introduce myself…
I’m a financial educator, successful investor, and best-selling author. Humble brag, I’m known for my unique ability to simplify complex investment strategies and empower everyday people just like you to take control of your financial futures.
And, I’m super excited to have recently created a fantastic training program with the fine folks here at Awesomely. It’s all about my proven system of turning any blue-chip stock into Cash Flow Machines (CFM). Regardless of whether you’re just getting started with stock options investing or you already know a thing or two… CFM is for you! And I’m thrilled to be your guide!
As it turns out, Awesomely’s blog post space is also the perfect spot to start learning and exploring the possibilities. Specifically, we’re covering the best stocks for covered calls.
Now then, if you’re new to the idea of generating income from the stock market, you might think your only options are to buy and hope for the best… or to sit on the sidelines, watching others play the game.
But what if I told you there’s a way to “rent out” your stocks, collecting steady cash flow month after month, just like a landlord collects rent?
That’s the beauty of covered calls… a strategy I use myself, teach to my kids, and one I believe every aspiring investor should have in their toolkit.
So, I’m gonna break down what makes a stock the “best” for covered calls, how to pick them, and why this strategy is like having your cake and eating it too (with a little whipped cream on top for good measure).
What’s a Covered Call, Anyway?
When considering the best stocks for covered calls, imagine you own 100 shares of a stock. You can sell someone else the right (but not the obligation) to buy those shares from you at a set price, within a certain time frame. In exchange, you pocket a premium: cold, hard cash, upfront.
If the stock doesn’t hit that price, you keep both your shares and the premium. If it does, you sell at your chosen price and still keep the premium. It’s like selling your Super Bowl tickets for a guaranteed profit, even if the game turns out to be a snoozer.
Said another way: A covered call is a promise to sell a stock you already own at an agreed-upon price until a certain date. In return, you receive a premium as income. This premium isn’t just based on the movement of the stock price, but on the movement of time.
Why Covered Calls? Because Cash Flow Is King
So, when it comes to the best stocks for covered calls, I’ve always been a fan of cash flow. Whether it’s real estate or stocks, I want my investments to pay me now… not just someday in the distant future.
Covered calls fit right into this philosophy. They’re conservative, repeatable, and can be done in most retirement accounts (yes, even your IRA).
Think of covered calls like running a lemonade stand: You’ve already got the lemons (your shares), so why not sell lemonade (call options) to thirsty buyers every month?
If the sun shines and business booms, great. If not, you still pocketed some cash for your effort.
The Secret Sauce: Picking the Right Stocks
So, what makes a stock “best” for covered calls?
Here’s what I look for with the best stocks for covered calls… no magic bullets, just time-tested criteria:
1. Liquidity and Volume
You want stocks that are actively traded, with tight bid-ask spreads. This ensures you can get in and out easily and that your options will have plenty of buyers and sellers.
Think of it like choosing a busy farmers market over a deserted roadside stand… you want lots of foot traffic.
2. Solid, Boring Businesses
I’m not looking for the next meme stock or moonshot. I want companies with real earnings, steady dividends, and a business model that’s built to last.
Warren Buffett calls this a “moat”: a durable competitive advantage.
If a company’s product is as essential as coffee on a Monday morning, it’s worth a look.
3. Reasonable Volatility
A little volatility is good… it means higher premiums.
But too much, and you’re riding a roller coaster with no seatbelt.
I like stocks that move, but not ones that throw tantrums. (Think: blue chips, not penny stocks.)
4. Dividend Payers
Dividends are the cherry on top. If a stock pays you for holding it, you’re stacking cash flow on top of cash flow.
It’s like getting paid twice for the same job… don’t tell my old boss.
Real-World Examples: Micron & U.S. Steel
Let’s get out of theory and into practice with a couple examples of the best stocks for covered calls….
In my own simulated trading account, I’ve used stocks like Micron (MU) and U.S. Steel (X) to demonstrate covered calls.
Here’s how it played out:
- Micron (MU):
- I sold 2 covered call contracts at a $50 strike price.
- The stock was trading around $53 at the time.
- For each contract, I collected $2.27 per share, or $454 total for 200 shares.
- That’s about a 4% return on $10,000 of capital… comparable to the cash flow from a rental house, but with a much lower barrier to entry.
- US Steel (X):
- I promised to sell shares at $30 when the stock was trading at $36.25.
- If the stock stayed above $30, I kept the premium.
- If it dropped, I’d be happy to own a solid company at a discount.
- Either way, I got paid.
Covered calls are like being a landlord, but instead of fixing leaky faucets, you’re collecting option premiums. And trust me, stocks don’t call you at 2 a.m. because the “toilet’s making a funny noise.”
Dialogue Example: Teaching My Son About the Best Stocks for Covered Calls
Actual convo with one of my kiddos…
Me: “So, if you sell a covered call, what’s the worst that can happen?”
Son: “I have to sell my shares at the agreed price, right?”
Me: “Exactly. And what’s the best that can happen?”
Son: “I keep the premium and the shares if the stock doesn’t hit the strike price.”
Me: “Bingo. It’s like getting paid to wait. And if you do it right, you can get all your money back out of the deal in a few years… then it’s infinite return time.”
He’s 14, but he gets it. Sometimes I think he’s just in it for the dad jokes, though!
The Best Stocks for Covered Calls Mindset: Bird in the Hand
When you sell a covered call, you’re taking a bird in the hand (the premium) and giving up 2 in the bush (potential extra gains if the stock soars).
But here’s the thing: I’d rather have steady, predictable cash flow than gamble on what might happen. History shows that covered calls are one of the most favorable, conservative strategies around.
And if you want to get fancy, you can use that premium to buy a put for extra downside protection: a strategy called a “collar.” That’s like wearing both a belt and suspenders.
Overkill?
Maybe.
But it sure keeps your pants up.
Common Qs: “But Andy, What If the Stock Rockets Higher?”
Great question!
If the stock shoots up past your strike price, you’ll have to sell at that price. But don’t sweat it, you still made a profit, plus the premium.
It’s like selling your old baseball cards for a tidy sum, only to find out one of them was worth a bit more. You made a good deal, and you can always buy back in if you want.
And yes, sometimes you might have to buy back a contract at a loss if you really want to keep your shares. That’s just part of the game. I’ve done it myself, and it’s a small price to pay for the consistent cash flow I get the rest of the time.
A Quick Metaphor Break for the Best Stocks for Covered Calls
Covered calls are like renting out your spare room on Airbnb… most of the time, you get paid for a room you weren’t using. Once in a while, you might wish you had the space back, but the steady income more than makes up for it.
(And unlike Airbnb guests, stocks don’t leave dirty towels behind.)
How to Start: Your Covered Call Checklist
Ready to give some of the best stocks for covered calls a shot?
Here’s a quick checklist, straight from my playbook:
- Pick a stock you’d be happy to own (think: solid business, good dividend, steady volume).
- Buy at least 100 shares (that’s the minimum for one options contract).
- Choose a strike price you’d be comfortable selling at.
- Sell a call option and collect the premium.
- Rinse and repeat: monthly, quarterly, or whenever it fits your plan.
Remember, always start in a simulated account if you’re new. Practice makes perfect, and there’s no shame in paper trading until you’ve got the hang of it.
Final Thoughts: Your Path to Cash Flow Starts Here
Covered calls aren’t a get-rich-quick scheme. They’re a time-tested way to turn your stock portfolio into a cash flow machine… month after month, year after year.
I use this strategy myself, teach it to my kids, and have seen countless students transform their financial futures by mastering this simple, powerful approach.
So, what are you waiting for?
The best time to plant a tree was 20 years ago. The second-best time is today. Start building your cash flow machine, one covered call at a time.
Ready for even more of the best stocks for covered calls?
Check out our Cash Flow Machines training program where we deep dive into these very concepts, so you can level up your bottom line.
Disclaimer: Options trading involves risk and isn’t for everyone. Always do your own research, and consider seeking advice from a qualified professional before diving in headfirst. Or, as I tell my kids, “Look both ways before you cross Wall Street.”