Best Stocks for Covered Calls: How to Pick the Right Underlying

Not every stock is ideal for covered calls. Learn what criteria to look for when selecting the best stocks for a covered call strategy, including volatility, liquidity, and fundamentals.

Best Stocks for Covered Calls: How to Pick the Right Underlying

Choosing the right stock is the foundation of a successful covered call strategy. Not all stocks make good candidates — the ideal underlying asset balances sufficient premium income with acceptable risk and stability.

Key Criteria for Selecting Covered Call Stocks

1. Moderate to High Implied Volatility (IV)

Implied volatility directly determines the size of the premium you collect. Stocks with higher IV generate larger premiums.

• Too low IV (e.g., utility stocks): Premiums are thin — not worth the effort
• Too high IV (e.g., meme stocks or biotech): Premiums are rich, but the stock may be dangerously volatile
• Sweet spot: IV Rank (IVR) between 30–60 tends to offer good risk/reward

2. Strong Liquidity in the Options Market

Look for stocks with tight bid-ask spreads and high open interest in their options chain. Poor liquidity means you'll lose money entering and exiting positions.

• Aim for bid-ask spreads of $0.10 or less
• Open interest of at least 500 contracts per strike
• Average daily options volume of 1,000+ contracts

3. A Stock You'd Be Happy to Own Long-Term

Since covered calls require you to hold the stock, choose companies with solid fundamentals — businesses you believe in. If the stock drops significantly, you'll be sitting on losses that exceed your premium income.

4. Neutral to Slightly Bullish Outlook

Covered calls work best when you expect a stock to trade sideways or rise modestly. Avoid selling covered calls on stocks you expect to make big moves — either up or down.

5. Price Between $20 and $150 Per Share

Stocks priced very low have tiny premiums. Very high-priced stocks (like AMZN or GOOG) require large capital commitments per 100-share lot. The sweet spot for most retail investors is $20–$150.

Types of Stocks That Work Well

• Large-cap dividend payers: Companies like AAPL, MSFT, JNJ, and KO offer stability plus decent IV
• Sector leaders with stable earnings: Well-established companies in energy, financials, and industrials
• ETFs with options: SPY, QQQ, and IWM are popular for covered calls due to excellent liquidity

Stocks to Avoid for Covered Calls

• Stocks with upcoming binary events (FDA decisions, earnings surprises)
• Penny stocks or thinly traded securities
• Stocks in a strong uptrend you don't want to miss out on
• Stocks you're not comfortable holding if called away

Using a Stock Screener

Use a covered call screener to filter by IV Rank, premium yield, and option liquidity. The Covered Calls 101 scanner lets you quickly identify the best covered call opportunities based on current market conditions.