| The Weekly Income Illusion |
I was planning to move on to the other half of the wheel strategy, but there were so many questions and suggestions about covered calls that I thought I should clarify a few things first.
A frequent question was:
Why not use covered calls on our DITM options?
It seems logical on the surface. Because DITM options require much less capital than owning shares outright, the premium income looks enormous as a percentage return on capital.
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But there’s a catch.
The upside you surrender becomes enormous too. Because leverage magnifies both gains and losses, the more leverage, the more painful the capped upside becomes during strong rallies.
The more you bet the more you give away!
As always, let’s analyze the actual figures.
Covered Calls Limit Your Upside
Let’s take a very simple example. Suppose every Monday morning at open we bought SPY and sold covered calls expiring that Friday – just 5 trading days later. I decided to back test it properly using the last 3 years of actual SPY data.
Is My Spreadsheet Broken?
The backtest results looked too extreme. In fact, I was so suspicious of the results that I ran the spreadsheet through two separate AI models to check formulae, assumptions and logic. Both said the same thing:
The calculations were correct.
The Startling Truth
At first glance the results seem impossible. How can a strategy that “collects income every week” end up giving away more upside than it receives in premiums?
The Covered Calls Secret
(that no-one talks about)
The answer lies in how market gains actually occur. Most weeks are relatively small, but a surprisingly large portion of long-term market returns comes from sudden sharp rallies.
Covered calls cap those rallies. You keep the small premium, but once the market rises beyond the strike, the extra gains belong to someone else.
Not You!
You’ve sold them away.
Three Year Backtest
Over the last 3 years there were 156 trading weeks. I tested what would have happened if, every Monday morning at open, we sold calls expiring Friday with strikes 1%, 1.5% and 2% above the current price. (actual options prices were on Thu 21 May before market open for expiry Thu 28 May I deliberately used option premiums 7 days to expiry to include the weekend, which will over-estimate the premiums received. Real-world results would likely be even worse.)
Being Assigned
First we have to check how often we would be assigned (our shares called away). It is surprisingly high.
- 1% above: assigned 36% of the time
- 1.5% above: assigned 21% of the time
- 2% above: assigned 15% of the time
And remember: when assignment occurs, every gain above the strike price belongs to somebody else. Not you. The premiums we keep, whatever happens. But what are we giving up? The table tells the whole story.
What upside are we giving up?
That is the point. We are giving up much more than we are earning. For the +1% strike the cumulative upside surrendered was over 70%, more than the premiums collected. In other words, the strategy:
gave away more upside than it earned in income.
As the strike moves further away, assignment becomes less frequent – but the premiums collapse as well. At +2%, assignment frequency falls to 14.7%, but annualized premium income drops to levels barely above ordinary market returns.
Why Do People Like Covered Calls?
This does not mean covered calls “never work.” In flat or slowly rising markets they can produce steady income and feel psychologically rewarding because most trades appear successful. You collect small amounts regularly and the strategy feels calm and controlled.
The problem appears during strong bull runs.
The very rallies that create long-term wealth are repeatedly capped, sliced off, and handed to somebody else.
The Trade Off
That is the hidden trade-off behind covered calls: small frequent income in exchange for sacrificing part of the market’s biggest gains.
What about QQQ?
I will let the results speak for themselves:
But . . what about stocks?
Ironically, even many examples used by covered-call educators demonstrate the very problem they are trying to avoid: the best gains are repeatedly capped. Heitkoetter frequently uses AAPL and TSLA, so let’s look at these.
AAPL Covered Calls
AAPL strikes do not have the granularity of SPY and QQQ, so it was not possible to check the 1.5% above, only the 1% and 2%. The results are startling:
That’s right – you can underperform buy-and-hold by around 20% a year doing covered calls on AAPL. And pay a LOT for the right to lose money. But first let’s check TSLA.
TSLA Covered Calls
You thought AAPL was bad? Hold onto your hat!
That’s right: by doing covered calls you are underperforming a simple buy-and-hold by around 70% a year.
Why would you do it?
Even more relevant – why would you PAY someone to tell you how to underperform the market?? But people do. And they pay a LOT! Heitkoetter cites 300,000 people doing his strategy.
Here’s what it costs (from the European Financial Review):
- PowerX Optimizer software: around US$3,997 one-off.
- Platinum coaching: around US$13,000 for 6 months.
- Diamond coaching: around US$30,000 for 12 months
Not only that , there are add-ons:
- masterminds,
- live strategy sessions,
- Wheel strategy training,
- memberships/community access, and
- trading education built around “weekly paychecks” from options selling.
And People Pay . . .
He explicitly promotes annualized premium calculations, “weekly paychecks,” and assignment rates. In his own material he says the scanner looks for: “annualized premium rate above 30%”
That sounds great . . . but what happens after accounting for the upside surrendered during assignment? The tables above tell the real story.
Most Active Traders Lose Money
Is it any wonder they crash & burn? Following strategies like this? What is never mentioned is the hidden cost of forgoing your upside.
Doing worse than buy-and-hold? That takes some doing!
But – you have to admire someone who can get 300,000 people to pay $30k a year for such a strategy.
To the markets . .
A nice week, but no new highs. Nvidia earnings once again dominated attention, with revenue and guidance continuing to surge on relentless AI demand. But the focus is gradually broadening beyond Nvidia itself, with traders increasingly watching the wider AI ecosystem – infrastructure spending, power demand, data centers, networking, software integration and whether the rest of corporate America can ultimately turn the AI boom into sustained profits.
SPY Charts
Two down days, three up days, not quite back to last week’s high – showing more of a consolidation pattern.
Still heading north out of the trading channel.
SPYG Charts
SPYG finished the week roughly where it started. No new highs.
The long term chart shows it still bouncing off the upper bound of the trading channel.
QQQ Charts
QQQ almost but not quite made a new high. Also showing consolidation.
Long term it is staying above the trading channel, but starting to consolidate.
VIX Chart (Volatility)
Vix back in low volatility territory.
ITMeter
The week ahead . .
Likely to be quieter early in the week due to the U.S. Memorial Day holiday on Monday, but inflation and growth data later in the week could still move markets. AI spending, bond yields and consumer strength remain key themes – and, of course, the situation in the Middle East.
Monday – May 25
• U.S. markets closed for Memorial Day.
• No major economic releases.
• Earnings: none major.
Tuesday – May 26
• Consumer Confidence.
• S&P/Case-Shiller Home Price Index.
• Earnings: AutoZone, Box, Zscaler.
Wednesday – May 27
• Richmond Fed Manufacturing Index.
• Earnings: Salesforce, HP, Abercrombie & Fitch.
Thursday – May 28
• Core PCE Inflation — the Fed’s preferred inflation measure.
• GDP (second estimate Q1).
• Durable Goods Orders.
• Personal Income & Spending.
• Weekly Jobless Claims.
• New Home Sales.
• Earnings: Costco, Dell, Autodesk, MongoDB, Marvell.
Friday – May 29
• Chicago PMI.
• Wholesale Inventories.
• Earnings: Buckle.
Key themes this week:
• Inflation remains front and center with Core PCE on Thursday.
• Bond yields continue to pressure valuations, especially tech.
• AI infrastructure spending remains dominant after Nvidia’s strong earnings.
• Dell and Marvell may provide further insight into AI server and hardware demand.
The Futures
Monday is a NYSE holiday, but the futures are open and pointing to a good day Tuesday.
Next Week
We’ll get further into The Wheel Strategy, including looking at it in the context of the evolving options market.
Let’s hope for a brilliant week!
Heather
Trade the tide not the waves
4 Responses
Thanks for your analysis. I have always been skeptical of making money using covered calls. The market conditions under which you actually come out ahead are very limited.
Good blog as usual. I don’t know how you do it every week! Your bottom line that covered calls and similar strategies for a selling premium like Iron Condors only work in flat or relatively calm markets is certainly true. So why not use indicators that tell you when the market is likely to be favorable for the strategy to work. I use a combination of Bollinger Bands, RSI and ADX which together eliminate or filter out about half the trading days as unsuitable. The rest of the time the strategy runs favorably for the vast majority of the trades.
Heather
I agree with Lowell and I have been using LEAPS (currently using January 2028) and selling 30 day CC against the LEAP. Always sell the CC above the cost of the LEAP. Seems to be working just fine for me. Slow and easy…
Phillip
Another great blog, heather, but to be complete, mightn’t you next compare short duration v LEAP covering calls? selling short terms calls v shares is probably a coin flip,. Smoothing things out by selling a significant dollar amount of extrinsic value in a LEAP cc is a different and perhaps backtestedly better flip?