Pretty crazy that GOOGL went up by 9% on Thursday and that wrecked many long-term GOOGL holders who are selling covered calls for additional income.
This begs the question: how profitable is selling covered calls on Mag 7, given their implied volatility tends to be pretty low relative to the meme stocks and small caps?
The Backtest Setup
To answer this, I ran comprehensive backtests with varying parameters for covered calls across all Magnificent 7 symbols, plus QQQ as a benchmark. For each symbol, I optimized for the best performing configuration:
- Delta levels: Testing different strike selections
- Days to expiry: From 5 to 40 days out
- Roll timing: When to close and roll positions
For example, TSLA's best performing configuration was selling 40 delta calls 40 days from expiry and rolling 1 day before expiration.
The Surprising Results
The results are quite eye-opening:
The Winners
- NVDA: 9% excess return over 3 months, 16% over 1 year
- META: 8% excess return over 3 months, 13% over 1 year
The Strugglers
Outside of NVDA and META, the excess return generated by covered calls over the past year is quite small. Most symbols did beat QQQ as a benchmark (which has an excess return close to 0), but the outperformance was marginal.
The Losers
For stocks that had sudden spikes over the past year:
- GOOGL: -10% excess return over 3 months, -20% over 1 year
- TSLA: -1% excess return over 3 months, 1% over 1 year
Rolling covered calls during these explosive moves ended up realizing significant losses.
Key Insights
1. Bull Market Reality Check
In this bull market environment, selling covered calls on Mag 7 stocks has been a yield trap more often than not. The premiums collected rarely compensate for the massive upside given up during parabolic moves.
2. Event Risk is Everything
Covered calls probably only make sense if you're confident there are no big upcoming catalysts:
- GOOGL's antitrust developments
- Tesla's product announcements
- Meta's AI initiatives
- NVDA's earnings surprises
3. The Asymmetry Problem
The large asymmetry in payoff makes covered calls particularly dangerous in growth stocks. You collect limited premium but give up unlimited upside - a terrible risk/reward in trending markets.
What This Means for Your Strategy
When Covered Calls Work
- Sideways or mildly bearish markets
- High IV environments where premiums are rich
- Stocks you're willing to sell at strike prices
When to Avoid
- Strong bull markets (like 2024)
- Growth stocks with upcoming catalysts
- Low IV environments with rich valuations
Better Alternatives
Instead of capping upside with covered calls, consider:
- Cash-secured puts during pullbacks
- Protective puts to hedge downside while keeping upside
- Short strangles in high IV environments
Test Your Own Strategies
Want to backtest your own covered call strategies? Use our Visualizer to run historical simulations across different market conditions. You can also explore our Theta Gang strategies for more advanced options selling approaches.
For live performance tracking, check out our Options Leaderboard to see how current strategies are performing.
The Bottom Line
Overall, in this bull market, selling covered calls on Mag 7 probably only makes sense if you are sure that there are no big upcoming events. Otherwise, it's better to stay put and avoid giving up the upside given the large asymmetry in payoff.
The GOOGL example is a perfect case study: while you might have collected 1-2% in premium over a few months, you gave up 9% in a single day. That's the harsh math of covered calls in a momentum market.
This analysis was originally shared on r/options and has been expanded for our blog. All backtest data shown is for educational purposes only and past performance does not guarantee future results.