Achieving Our Goal When Selling a Defensive Covered Call – October 27, 2025
When we structure our covered call trades in a defensive manner, we have 2 main goals in mind. We seek greater protection to the downside than traditional put trades and we strive for significant, although lower returns. We accomplish these goals by selling deeper in-the-money call strikes. We are sacrificing potential premium returns in exchange for greater protection from share price decline. These trades are particularly useful in bear, volatile and uncertain market conditions.
A Real-Life Example with Dutch Bros Inc. (NYSE: BROS): (6/2/2025 – 6/13/2025)
- 6/2/2025: BROS trading at $69.38
- 6/2/2025: STO the 6/13/2025 $63.50 call at $6.90
- 6/2/2025: BTC/GTC limit order at $0.69 (10% exit strategy guideline)
- 6/13/2025: BROS closes at $68.14 on expiration Friday, down $1.24 from purchase price
- 6/13/2025: Despite the share price decline, this was a successful trade
Broker confirmation of trades
Initial Covered Call Trade Calculations: BCI Trade Management Calculator (TMC)
- The breakeven price is lowered from $69.38 to $62.48 (yellow cell)
- Initial time value return is 1.61%, 48.86% annualized (brown cells)
- This return is realized if share value remains above the $63.50 strike
- BROS closes at $68.14 on expiration Friday (6/13/2025)
- Despite share price declining by $1.24/share, this was a successful trade
Discussion
- Significant returns can be generated with 12-day defensive covered call trade
- Option trades can be crafted to align with all market environments and personal risk tolerance
- In the case of BROS, a significant initial 12-day return was captured and resulted in a successful trade
Author: Alan Ellman