A Guide to Trading Covered Calls in Your IRA

Jesse Anderson

Published on January 14, 2025

Are you looking for ways to bolster your retirement income? Do you want to reduce risk? If so, you might consider an options strategy gaining popularity in many retirement portfolios—covered calls. This relatively conservative options strategy can generate additional income from stocks you already own in your IRA.

In this guide, we’ll show you how to get started trading covered calls in your IRA. We’ll explain what covered calls are, why you might want to use them, how to get started, and even how to use a covered call screener to find potential opportunities.

What Are Covered Calls?

Covered calls are a popular options strategy that helps you generate additional income from stocks you own. But don’t worry – it’s simpler than most options strategies!

At its core, a covered call involves two parts:

1. You own shares of a stock in your portfolio.
2. You sell (or “write”) call options against those shares.

When you sell a call option, you’re giving someone else the right to buy your shares at a specific price (called the strike price) before a certain date (known as the expiration date). In exchange, you receive a premium – cash paid upfront to you!

Here’s a quick example:

• Suppose you own 100 shares of ABC stock, which trades at $50 per share.
• You sell a call option with a $55 strike price that expires in one month, receiving a $2 per share premium payment in cash.
• You immediately collect $200 (100 shares x $2 premium).

Now, one of two things can happen:

1. If the stock price stays below $55, the option expires worthless. You keep your shares and the $200 premium.
2. If the stock price rises above $55, the option buyer might exercise the option. You’d sell your shares for $55 each, plus you keep the $200 premium.

The “covered” part of “covered call” means you already own the shares, so you’re never taking on any additional risk beyond what you already have as a shareholder.

For many investors, covered calls offer a way to earn extra income while potentially reducing overall risk. It’s a strategy that works well in many market conditions, making it an interesting tool for IRA investors looking to maximize returns.

Why Trade Covered Calls in Your IRA?

Covered calls have a lot to offer retirement investors.

By selling covered calls, you can earn premiums on stocks you already own, essentially creating a “dividend-like” income stream even from non-dividend-paying stocks. This extra cash flow can be valuable in an IRA, where the goal is to maximize growth for your retirement nest egg or generate a steady source of retirement income.

Trading covered calls in a Roth IRA is also a tax-efficient way to boost your returns. The premiums you collect from these trades are considered investment income in your account. As such, they grow tax-free alongside your other investments. So, it’s an attractive option to maximize your IRA’s income potential while maintaining long stock positions. And, even if you have to sell stock because of a call option, you won’t owe capital gains taxes.

Another significant benefit is risk management. The premiums you receive from selling covered calls act as a small buffer against potential stock market declines. By slightly reducing your portfolio’s risk, covered calls can help smooth out some of the market’s ups and downs, resulting in less volatility and more predictability.

However, while covered calls offer many advantages, it’s crucial to remember that like any investment strategy, they come with their own set of risks and considerations. Namely, covered calls limit your upside potential, which can lead to high opportunity costs. These costs can be significant over longer time horizons.

Getting Started with Covered Calls in IRAs

Most IRAs allow options trading, but you may need to request special permissions from your broker. This usually involves answering some questions about your investment experience and financial situation. But don’t worry if you’re new to options – many brokers allow covered calls even for beginners!

Next, consider which stocks in your IRA are suitable for covered calls.

Some things to look for include:

• Stocks where you own at least 100 shares since each option contract is for 100 shares.
• Stocks with a neutral or moderately bullish outlook reduce the odds that the option is exercised.
• Stocks with sufficient options liquidity, meaning there’s an active market for options on that stock.

When just starting, it’s a good idea to begin with shorter-term options that are less than 30 days out on stable, blue-chip stocks you already own and understand. This makes it easier to get a feel for the mechanics of the strategy without taking on too much risk.

Remember, the goal is to balance the potential premium income against the possibility of having your shares called away. You should also be comfortable with the idea of selling your shares at the strike price you choose.

After initiating a covered call position, you should keep an eye on the stock price as it moves closer to expiration. If you want to avoid having to sell the stock, you can buy-to-close the option or consider rolling up or rolling out the option. Keep in mind, the cost to close the option could be more than the premium you originally collected when opening the covered call position. 

You can learn more about covered call mechanics by taking Snider Advisors’ free e-course!

Finding the Right Opportunities

Writing covered calls against existing long stock positions is a great start, but sooner or later, you may want to find higher-yielding opportunities. For example, you might want to find a suitable stock that offers the greatest yield to boost your monthly income rather than just writing covered calls against stocks you already own.

This is where a covered call screener comes in handy.

A covered call screener sifts through thousands of stocks and options to find opportunities that match your investment goals and risk tolerance. That way, you don’t have to spend time manually checking stocks and can make quick, data-driven decisions.

optionDash makes it easy to find opportunities and sort them by downside protection, if-called return, annualized return, and more. Source: optionDash

optionDash helps novice and experienced investors quickly identify covered call opportunities that align with their IRA investment strategy. Whether you’re looking for high-premium options, safer near-the-money calls, or anything in between, we can help you find potential trades in just a few minutes rather than a few hours or days.

In addition to finding high-yield covered call opportunities, we provide in-depth fundamental and technical analysis tools to ensure you’re not taking on too much risk for a retirement portfolio. You can see quality, value, and trend scores at a glance using our simple visualizations. And if you want more information, you can click on each stock to see an in-depth analysis.

But remember, while a screener is a powerful tool, it’s important to do your research and understand each trade before executing it. Screeners should be a starting point for identifying opportunities, followed by applying your analysis and judgment before making any investment decisions.

The Bottom Line

Covered calls can be a valuable strategy for potentially boosting returns in your IRA. By generating additional income from stocks you already own, you have the opportunity to enhance your retirement savings in a relatively conservative manner.

Get started with optionDash today!