TL;DR
- Employer stock is often the single biggest position in your portfolio, which makes it the perfect place to generate extra income.
- Selling covered calls on it can add 6-12% annual premium, but you need a pre-plan in case the stock rockets above your strike.
- Run this only in a taxable account (RSUs and 401k matches have restrictions) and always size the trade so a sudden gap-up cannot blow up your plan.
Back in 2008 my account was down 42%. I had ridden the same three growth names straight down because I had no exit plan and no way to get paid while I waited. That pain forced me to build the covered-call system we use today. The first stock I ever used it on was the one I knew best: the company that had employed me for 14 years. The next 12 months that sleepy position coughed up an extra $38,200 in premium while the stock itself moved sideways. It was the light-bulb moment that proved boring can make you rich.
The Hidden Risk In Your Largest Holding
Most professionals I talk to have 30, 50, sometimes 80 percent of their net worth tied up in employer equity. You know the fundamentals better than any analyst, but you also have zero diversification if the story breaks. Covered calls do not fix the concentration problem, yet they do pay you rent while you decide what to do next. The trick is to treat the position like any other trade: decide in advance what you you will accept and what you will do if the stock blasts through your short strike.
Two Questions Before You Sell The First Call
1. Is the stock in a taxable account? RSUs in a brokerage account work. ESPP shares once they settle work. What does not work is unvested RSUs or shares still inside the 401k match window. If you are unsure, call the stock-plan administrator and ask two words: can I sell calls against these shares? If the answer is no, move on.
2. What is the circuit breaker? The moment you sell a call you have capped your upside at the strike price. Decide now what you will do if the stock rallies 20% next week. My rule is simple: if the short call goes in-the-money by more than two strikes, I buy it back and roll up and out for a credit or at even money. I never let a single position push me above my pre-set allocation limit.
How I Structure The Trade
I keep the mechanics boring. I sell calls 3-6 weeks out, one strike out-of-the-money, on only one-third of the position at a time. If the stock sits, I collect the premium and repeat. If it rallies, I roll or let the shares get called away and immediately start re-building the position with new covered calls on the next pullback. This keeps the position size in check and gives me plenty of liquidity to handle a surprise tender offer or merger.
The IRS is straightforward here: premium is short-term capital gain when the call expires or is closed. Shares that get called away are long-term if you have held them longer than one year. I track everything in a simple spreadsheet so my accountant never has to guess.
The One Mistake That Wipes People Out
The fatal error is going all in on weeklies because the premium looks juicy. A single takeover rumor can gap the stock 25% overnight, leaving you with a short call that is now deep in-the-money and a tax bomb you did not budget for. Size the trade so that the worst case scenario is annoying, not devastating. For most clients that means never selling calls on more than 30% of the total employer-stock stash at any one time.
Can I sell calls on ESPP shares?
Yes, once the shares settle in your brokerage account and the holding period has passed. The plan document will tell you the exact date you are free to trade options on those shares.
What happens if the stock rallies past my strike?
Your shares get called away at the strike price. You keep the premium and the strike price. If you want to keep the stock, buy the call back and roll the position up and out for a credit.
Will this trigger wash-sale rules?
No. Covered calls are separate contracts, so buying the call back to close does not reset the holding period of the underlying shares.
If you want a step-by-step walkthrough, watch the latest video where I build the trade live on screen. Otherwise, grab the checklist inside our Options Mentorship and run the numbers yourself.
This is education, not financial advice. Past performance is not indicative of future results. Consult a qualified advisor before making investment decisions.