When Does a Covered Call Strategy Underperform?
A covered call strategy has a clear weakness: a strong, one-sided bull market. In an environment where the market keeps grinding higher, your upside gets capped by the short call, and you will underperform simply holding the underlying asset. In addition, during a sharp, one-sided crash, the small premium collected from selling the call can't fully offset the huge loss on the spot position, leaving you behind as well.
Why Does a One-Sided Rally Cause Covered Calls to Lag?
A covered call involves holding a spot asset (like Bitcoin or a stock) while selling a call option against it. Basically, you exchange the potential profit above a certain price for a certain "rent" (the premium).
The cost in a bull market: If you sold a call with a strike price of 70,000 and Bitcoin rallies to 80,000, your spot gains are offset by losses on the short call. Your return is effectively capped at the strike price plus the premium received; any further upside is no longer yours.
Supporting data: According to historical backtests, in years when the S&P 500 posted annual gains above 10%, the covered call strategy (as represented by the CBOE BuyWrite Index) underperformed the broad market almost without exception. For instance, in 2025, the S&P 500 rose 17.86%, while the covered call strategy gained only 8.91%. Similarly, the Nasdaq-100 covered call ETF (QYLD) has distributed attractive dividends since its 2013 inception, yet its total annualized return has significantly lagged the index it tracks.
Why Does It Also Lag During a Crash?
The covered call strategy is often mistaken as a hedge against declines, but that's an illusion.
Limited protection: The premium you collect from selling the option can only offset a small portion of the spot loss in a 10% or 20% plunge. In essence, you are still exposed to the downside.
Data confirmation: Over the past decade, the S&P 500 covered call index has captured 88% of the market's downside but only 63% of the upside. That means you barely escape the falls, and you don't fully participate in the rallies. During the COVID crash in March 2020, the covered call strategy fell 29% alongside the market, offering almost no protection, and then captured only about half of the subsequent rebound.
In Which Two Market Conditions Does a Covered Call Shine?
Sideways, range-bound market: When prices go nowhere, the underlying asset generates no gain, but you can steadily collect premiums to enhance returns.
Moderate decline: Premium income can slightly cushion the paper losses on your spot position, so you lose less than someone simply holding through the decline.
How to Tell If Your Strategy Is Underperforming
You don't need to stare at your P&L; watch these two signals instead:
Benchmark your portfolio: If the coin you hold has rallied far beyond your chosen strike price over the past 3–6 months (e.g., up 40% while your strike is only 10% above the spot price at inception), your covered call strategy is definitely trailing a simple buy-and-hold approach.
Frequent assignments: If your options frequently expire in the money (spot price above the strike), it shows the market is rallying hard and your upside ceiling keeps getting hit — it's time to consider adjusting your strategy.
If you see that the market is in the early stages of a strong rally, you might consider rolling up — closing the current option that is at high risk of being assigned and selling a new one with a higher strike price, freeing up some upside potential. But keep an eye on transaction costs and the new risk exposure.
