The Market Just Dropped 1.7% in a Day. Here’s Why I Wasn’t Worried.
Yesterday, the S&P 500 fell 1.74% on Iran tensions and rising oil prices. The Nasdaq dropped 2.38%. My phone was buzzing with messages from panicked investors.
Meanwhile, I was collecting premium.
Look, I’ve been through multiple bear markets in my 40+ years of trading — the 2000 dot-com crash, the 2008 financial crisis, the 2020 COVID panic, the 2022 inflation selloff. And I can tell you from direct experience: covered call income doesn’t disappear when markets decline. In many ways, it actually gets better.
But you have to adjust your approach. The same strategy that works beautifully in a calm, rising market can get you into trouble when things turn ugly — if you don’t know what to tweak. That’s exactly what I want to walk through today.
Why Bear Markets Are Actually Opportunity for Covered Call Sellers
Here’s something that surprises most people: volatility is a covered call seller’s best friend.
When the VIX spikes — and we’ve seen it surge as high as 30 this month alone — option premiums expand dramatically. The same call option that might have paid $1.50 in a calm market could suddenly pay $3.00 or even $4.00 in a volatile one. That’s literally double or triple the income on the same position.
Think about it like this. I use the analogy that stocks are like property and option premiums are like rent. When a hurricane warning goes out, insurance premiums skyrocket. The same principle applies to options. Fear drives prices up, and as sellers, we’re on the right side of that equation.
The key is knowing how to adapt your Cash Flow Machine system to capitalize on elevated volatility without taking on unnecessary risk.
My 5-Step Bear Market Covered Call Playbook
Step 1: Shift to In-the-Money Calls
This is the single most important adjustment you can make. In a normal or rising market, I often sell out-of-the-money calls to leave room for upside. But when the market is under pressure, I shift to in-the-money calls.
Here’s why it matters. Suppose you own 100 shares of a quality stock trading at $100. In a bullish market, you might sell the $105 call for $2.00. That gives you 2% income but only $2 of downside protection.
In a bearish environment, instead sell the $95 call for $8.00. Yes, you’re capping your upside at $95 — but you now have $8 of downside protection. The stock can drop 8% before you lose a single dollar. That’s the Fortress strategy in action — my most conservative approach, built specifically for environments like this.
Step 2: Tighten Your Stock Selection
In a bull market, a rising tide lifts all boats. In a bear market, stock selection becomes absolutely critical. This is one of my Four Cornerstones — picking the Right Stock.
During downturns, I focus on:
- Low-beta, high-quality names — companies with strong balance sheets, consistent earnings, and competitive moats
- Stocks with high implied volatility relative to their historical range — this means fatter premiums without necessarily more actual risk (here’s my full IV guide)
- Avoiding earnings season surprises — I’ll often skip writing calls into an earnings report during a bear market, because a miss can trigger a 15-20% gap down that no amount of premium can cover
Step 3: Shorten Your Time Horizon
In a bear market, I prefer weekly or biweekly expirations rather than monthly. Why? Two reasons:
First, shorter expirations let you re-evaluate and adjust more frequently. If the market suddenly reverses, you’re not locked into a position for 30 days.
Second, time decay — what options traders call theta — accelerates dramatically in the final week before expiration. You capture the same percentage of premium in less time, which means a higher annualized return with more flexibility to adapt.
Step 4: Keep Cash Available
This sounds basic, but it’s where most income investors stumble. In a bear market, I target having 20-30% of my portfolio in cash. This serves a dual purpose: it protects you from being fully exposed when the market drops further, and it gives you the capital to buy quality stocks at deeply discounted prices.
Some of my best trades over four decades have been buying stocks during a panic and immediately writing in-the-money covered calls against them. You’re getting a great stock at a bargain price AND collecting inflated premiums. That’s when the Wheel Strategy really shines — selling cash-secured puts to get into positions at even lower prices, then writing calls once assigned.
Step 5: Use Rolling to Manage Losing Positions
In a bear market, some of your positions will go against you. That’s inevitable. The question is how you respond.
This is where rolling your covered calls becomes essential. If a stock drops significantly, the call you sold will lose most of its value quickly. I use the 80% rule — if my short call has lost 80% of its value, I buy it back and sell a new one at a lower strike or later expiration to collect additional premium.
For example, say you sold a $100 call for $3.00 and the stock has dropped to $92. That call might now be worth $0.40. Buy it back for $0.40 (capturing $2.60 of the $3.00), then sell the $90 call for $4.50. You’ve now collected $7.10 in total premium ($3.00 + $4.50 – $0.40) and have protection all the way down to about $85.
A Real-World Bear Market Example
Let me illustrate with a hypothetical educational example. Say you have a $200,000 portfolio allocated across 4 quality positions of roughly $50,000 each, plus $50,000 in cash (that’s a 20% cash reserve).
| Position | Shares | Price | Strike (ITM) | Premium | Monthly Income | Downside Protection |
|---|---|---|---|---|---|---|
| Stock A | 500 | $100 | $95 | $7.50 | $3,750 | 7.5% |
| Stock B | 300 | $165 | $155 | $14.00 | $4,200 | 8.5% |
| Stock C | 250 | $200 | $190 | $16.00 | $4,000 | 8.0% |
| Stock D | 400 | $125 | $118 | $11.00 | $4,400 | 8.8% |
| Total Monthly Income | $16,350 | |||||
That’s a potential $16,350 per month in premium income, with 7.5-8.8% downside protection on every position, plus a $50,000 cash cushion. Even if the market drops 10%, your portfolio would be down roughly 1-2% thanks to the deep in-the-money premiums absorbing most of the decline.
Compare that to a buy-and-hold investor who would take the full 10% hit — a $20,000 loss on $200,000. Your covered call approach would have generated $16,350 in income while limiting your drawdown to a fraction of theirs.
What About the Current Market Environment?
Right now, as I write this in late March 2026, the market is sending mixed signals. The S&P 500 has closed below its 200-day moving average for the first time since May 2025. The Shiller CAPE ratio sits near 40 — the second-highest reading in 155 years. Geopolitical tensions with Iran are pushing oil prices higher and rattling equity markets.
Does that mean we’re headed for a bear market? I don’t have a crystal ball, and nobody does. But it means the probability of increased volatility is elevated — and that’s exactly the environment where income-focused covered call strategies can outperform.
My Cash Flow Machine system has three strategies for exactly this reason. The Fortress strategy is built for uncertain markets — maximum downside protection, conservative strike selection, income-first mentality. Balance Point offers the most premium income by selling at-the-money strikes. And Rocket gives you the most upside potential in a recovery. All three are income strategies, not capital gains strategies.
The ability to switch between these approaches based on market conditions is what separates professional covered call sellers from people who just buy an ETF and hope for the best. (I wrote about that distinction in my post on covered call ETFs vs. selling your own calls.)
Frequently Asked Questions
Should I stop selling covered calls entirely during a crash?
Not necessarily. During extreme volatility events — like the kind we saw briefly in early March when the VIX touched 30 — the premiums can be extraordinary. However, if markets are in absolute freefall with 5%+ daily moves, it can make sense to step aside for a few days and let things stabilize. There’s no rule that says you must always have an open position. Patience is its own form of risk management.
Do covered calls protect me from a 30-40% market crash?
No strategy fully protects you from a catastrophic decline. In the 2008 financial crisis, the Cboe S&P 500 BuyWrite Index declined roughly 29% compared to the S&P 500’s 32% drop — that’s only about 3 points of cushion. But here’s the difference: active covered call sellers who adjusted their strikes, rolled positions, and kept cash reserves did significantly better than that index. The premium income can offset a substantial portion of the decline — and you can add protective puts using some of that income for additional insurance.
What’s the best covered call strategy to use in my IRA during a downturn?
The same principles apply inside an IRA, with one key advantage: you don’t have to worry about tax implications from frequent rolling. In a bear market within your IRA, focus on in-the-money calls on your highest-quality holdings and keep selling premium. The tax-deferred compounding of that income is extremely powerful over time.
How do I decide which strike price to choose during a bear market?
I use a systematic framework based on the stock’s implied volatility, the current market trend, and my income targets. In bear markets, I typically go 3-5% in the money for maximum protection. My strike price selection guide walks through the exact process step by step.
Turn Market Fear Into Monthly Income
Bear markets separate the prepared from the panicked. While most investors are frozen with fear or panic-selling at the worst possible time, educated covered call sellers are calmly collecting premium — and often at the highest rates the market offers.
The key is having a system in place before the storm hits. If you’re ready to learn exactly how to build that system — including the Fortress strategy designed specifically for uncertain markets — watch my Free MasterCourse. It’s a 50-minute training where I walk you through the entire Cash Flow Machine approach, including how I’ve navigated every bear market since the 1980s.
Don’t wait until the next big drop to figure this out. The time to prepare is now.
The information in this article is for education and information purposes only. This is not financial advice. Past performance does not guarantee future results. Option trading involves risk and is not suitable for all investors. The examples used are hypothetical illustrations for educational purposes and do not represent actual trades or guaranteed outcomes. Please consult a licensed financial professional before making any investment decisions.