A Covered Call Strategy to Avoid Greed in a Stretched Market
Friday is the 25th anniversary of 9/11, so a somber prayer and remembrance for all that were lost that day. It is also my 60th birthday on Friday.
A quarter of a century ago, I had a bird’s eye view of those horrific events from the 47th floor of the World Financial Center across the street from the Twin Towers. I have tried to consider every day I have walked this earth since then as gravy, as it helps me to keep things perspective and remember how precious life is.
The markets remain beguiling for me. I have always considered myself a value investor on most days while embracing GARP trades as they present themselves. And pickings in either category are mighty slim these days.
One of my favorite podcasters and fellow curmudgeon Dave Collum put out this tweet this week that highlights some of the absurdity in my view of current market valuations: “Apple’s ($AAPL) revenues are up slightly above 100% in 10 years. Its share price is up slightly above 1000% over those same 10 years. Somebody tell me how this is supposed to end well.”
Meanwhile, a director of Nvidia Corp. ($NVDA) has recently sold just over $400 million worth of shares and he also filed to sell nearly $1.1 billion more. To put these transactions in perspective, combined this is what neocloud provider CoreWeave ($CRWV) raised during its debut on the public markets in spring 2025. This was the largest tech IPO since 2021 at the time, of note.
This is why I am largely taking long positions within covered call holdings these days and also keeping 25% to 30% in cash and short-term Treasuries within my portfolio. My portfolio is currently outperforming the Dow and is only roughly 2% behind the performance of the Nasdaq and S&P 500 year to date. I am more than happy with those returns, given that I am taking far less risk than pure equity given the current economic and geopolitical backdrop.
Utilizing covered call orders also expands my potential targets for new trades. Unlike most retail investors, who are constantly scouting for stocks that can outperform passive index funds, I just need to find stocks that are fairly or slightly undervalued given their growth prospects. They only need to trade flat or slightly down over the next two quarters or so for me to make a more than acceptable return in an overbought market.
I have been choosing call strike prices 5% to 15% below the current trading level of my target these days given my angst around the overall market. A typical trade will select a stock trading in the mid-$40s, as way of example. I will select the March or April $40 call strike for this hypothetical covered call trade. A typical trade like this will have my covered call orders execute with a net debit (stock price minus the option premium) of $34.00 to $35.00 a share.
Let’s chart the ways this trade can go:
If the target stock trade trades flat, I make a return in the mid-to-high teens over the next six to seven months. If the stock trades down 10% over the option duration, the same scenario plays out. Now, if the stock ends up being under $40.00 at option expiration, the trade will not expire in the money. However, I will end up with an equity I was fine owning in the mid-$40s for an entry point in the mid-$30s.
Now, if the stock moves up to $60 or $70 a share by spring, I will have left some money on the table. However, I can promise you I will not feel even a pang of FOMO if that happens. I learned a long time ago to be grateful for every good day on earth and for every profitable trade.
At the time of publication, Jensen had no positions in any securities mentioned.
