Best Covered Call Stocks Under $20: How to Pick Low-Price Names That Actually Pay

The Short Answer: What Makes a Sub-$20 Stock Good for Covered Calls?

The best covered call stocks under $20 are liquid, optionable names with enough implied volatility (IV) to generate meaningful premium without being so wild that assignment risk becomes a constant headache. You want stocks with tight bid-ask spreads, open interest above 500 contracts per strike, and a business stable enough that you would not mind holding 100 shares for several months.

Price alone does not make a stock good or bad for covered calls. A $15 stock with thin options volume will earn you less — and cost you more in slippage — than a $19 stock with active weekly options. The checklist below will help you separate the real opportunities from the traps.

Why the Under-$20 Price Range Is Different From Blue-Chip Covered Calls

When you sell a covered call on a $150 stock like one of the major tech names, one contract controls $15,000 worth of stock. At $15 a share, one contract controls only $1,500. That changes the math in two important ways.

First, commissions and bid-ask spreads eat a bigger percentage of your premium. If you collect $0.25 per share ($25 per contract) on a $15 stock, a $0.05 wide spread costs you 20% of your gross income before you even factor in commissions. Second, lower-priced stocks often carry higher percentage IV because the market prices in more uncertainty per dollar of stock price. That can work in your favor — higher IV means fatter premiums — but it also means the stock can move sharply against you.

The Options Industry Council (OIC) notes that covered calls cap your upside at the strike price plus the premium collected. On a $15 stock, a $1 move upward past your strike is a 6.7% gap you give up. Keep that in mind when choosing how far out-of-the-money to go.

The Five-Point Checklist for Picking Sub-$20 Covered Call Candidates

Use these five filters before committing capital:

1. Options open interest of 500+ contracts at your target strike. Thin markets mean wide spreads and poor fills. Check this on your broker's options chain before placing any order.

2. Implied volatility rank (IVR) between 30 and 60. Below 30, premiums are too thin to bother. Above 60, the stock is probably in crisis mode and the premium is pricing in real danger.

3. No earnings announcement inside your expiration window unless you are intentionally playing the volatility crush. FINRA reminds retail investors that options prices can move dramatically around earnings, and a surprise can wipe out several months of premium income in one session.

4. Average daily volume above 1 million shares on the stock itself. Volume on the underlying drives volume in the options market.

5. A business you understand and would hold through a 20% drawdown. Covered calls do not protect you from a stock falling hard. The premium offsets losses only slightly. If the stock drops from $15 to $10, your $0.30 premium cushion barely matters.

A Worked Example: Selling a Covered Call on a $17 Stock

Let us walk through a real-style example using Ford Motor Company (F), which has traded in the $10–$20 range for years and carries active weekly and monthly options.

Assume F is trading at $17.20 on a Monday morning. You already own 100 shares. You look at the options chain for the expiration 30 days out and find the $18 call (slightly out-of-the-money, delta roughly 0.30) is bid at $0.38 and offered at $0.42. You sell one contract at the mid-price of $0.40 and receive $40 in premium, minus commissions.

Scenario A — Stock stays below $18 at expiration: The call expires worthless. You keep the $40 and your 100 shares. Annualized, that is roughly $40 x 12 = $480 on a $1,720 position, or about 27.9% annualized yield on the stock cost — before taxes.

Scenario B — Stock closes at $18.50 at expiration: Your shares are called away at $18.00. You collect $18.00 x 100 = $1,800 plus the $40 premium = $1,840 total. You miss the extra $0.50 per share above your strike, but your total return from $17.20 is $620, or 36% in 30 days. Not a bad outcome.

Scenario C — Stock drops to $14.50: You keep the $40 premium but your shares are now worth $1,450 instead of $1,720. The premium reduced your loss from $270 to $230, but you still have a significant unrealized loss. This is the core risk of covered calls — they are not a hedge, they are an income layer on top of stock ownership.

Note on taxes: The IRS treats premiums received from selling covered calls as short-term capital gains in most cases. If the call is exercised, the premium is added to the proceeds of the stock sale. Canadian investors should check CRA guidance, as the treatment of option premiums can differ depending on whether you are classified as a trader or investor.

What Risks Are You Actually Taking With Low-Price Covered Calls?

Covered calls on sub-$20 stocks carry the same fundamental risks as any covered call, but a few are amplified by the lower price point.

Downside exposure is proportionally larger. A $2 drop on a $17 stock is an 11.8% loss. On a $150 stock, a $2 drop is 1.3%. Your $40 premium does not change that math.

Liquidity risk is real. If you need to close the position early — say, to harvest a tax loss or because the thesis changed — a wide bid-ask spread on a thinly traded option can cost you $10–$20 per contract just in slippage. On a $40 premium, that is 25–50% of your income gone.

Assignment risk around ex-dividend dates. If the stock pays a dividend and your call is in-the-money, the buyer may exercise early to capture the dividend. The SEC has published guidance explaining that American-style options (which most US equity options are) can be exercised at any time before expiration. Check the dividend calendar before selling calls on dividend-paying stocks.

Concentration risk. Because sub-$20 stocks require less capital per 100-share lot, some investors pile into multiple positions in the same sector. Diversify across at least three to four different industries.

Finally, do not confuse high premium yield with safety. A stock paying 4% monthly in premium is usually doing so because the market thinks it could move 15–20% in either direction. The premium is compensation for risk, not a free lunch.

Three Categories of Sub-$20 Stocks Worth Screening

Rather than naming specific stocks as buy recommendations — which would require knowing your cost basis, tax situation, and risk tolerance — here are three categories that historically produce liquid, premium-rich covered call candidates in the sub-$20 range.

Large-cap stocks temporarily trading below $20. Major companies sometimes trade below $20 during broad market selloffs or sector rotations. These names tend to have the deepest options markets, tightest spreads, and most predictable behavior. Ford (F), Bank of America (BAC), and similar large-cap financials or industrials often fall into this range.

Liquid ETFs under $20. Some sector ETFs and leveraged ETFs trade below $20 and carry active options markets. The CBOE tracks options volume across ETFs, and several sector funds consistently rank in the top 50 by options volume. ETFs eliminate single-stock earnings risk, which simplifies your covered call calendar management.

Mid-cap growth names with high IV. Some mid-cap technology, energy, or materials companies trade in the $10–$20 range with implied volatility above 50%. These can generate premium yields of 3–6% per month, but the stock price can also move 20–30% in a quarter. Only use these if you have a strong conviction on the underlying business and can stomach the volatility.

Whatever category you screen, always verify the options chain before buying the stock. A stock with no listed options, or options with open interest under 100 contracts, is not a covered call candidate regardless of its price.

How to Size Positions When Capital Is Limited

One practical advantage of sub-$20 stocks is that you can build a diversified covered call portfolio with less capital. At $17 per share, one 100-share lot costs $1,700. At $150 per share, one lot costs $15,000. That means a $10,000 account can hold five or six different sub-$20 positions versus fewer than one full lot of a high-priced stock.

The OIC recommends that new covered call writers start with no more than one or two positions to understand the mechanics before scaling up. Once you are comfortable with assignment, early exercise, and rolling, you can add positions systematically.

A reasonable rule of thumb: no single covered call position should represent more than 20–25% of your total portfolio. If one stock gets crushed, you want the rest of your positions to keep generating income while you decide whether to hold, roll, or exit the losing name.

Also keep cash reserves. If a stock drops sharply and you want to buy more shares to average down — or simply to avoid being forced to sell at the worst moment — having 20–30% of your portfolio in cash gives you options (pun intended).

What is the minimum stock price for selling covered calls?

There is no regulatory minimum stock price for selling covered calls, but practically speaking, stocks below $5 often have illiquid options markets with spreads so wide they eliminate most of the premium income. Most experienced covered call writers focus on stocks above $10 to ensure reasonable options liquidity. FINRA and the OIC both emphasize that liquidity is a key factor in options trading costs.

How much premium can I realistically collect on a $15 stock?

On a liquid $15 stock with moderate implied volatility, a 30-day at-the-money call might generate $0.40–$0.70 per share, or $40–$70 per contract. That works out to roughly 2.7–4.7% of the stock price per month, though actual premiums vary with market conditions and IV levels. Always check the live options chain rather than relying on historical averages.

Is it better to sell weekly or monthly covered calls on cheap stocks?

Monthly options (28–35 days to expiration) generally offer better premium per day of risk and tighter bid-ask spreads than weeklies on lower-priced stocks. Weeklies can work on highly liquid names like major ETFs, but on a $15 mid-cap stock, the weekly premium may be only $0.05–$0.10, which barely covers commissions. Start with monthlies and move to weeklies only once you confirm the options market is deep enough.

What happens to my covered call if the stock gets called away?

If the stock closes above your strike price at expiration, the option buyer will typically exercise, and your 100 shares will be sold at the strike price — this is called assignment. You keep the premium you collected plus any gain from your purchase price to the strike. The IRS treats the premium as part of your sale proceeds, so your taxable gain includes both the stock appreciation and the premium received.

Can I sell covered calls in a Roth IRA or TFSA on stocks under $20?

Yes, covered calls are permitted in most Roth IRA accounts as long as your broker approves you for the appropriate options level, which typically requires a brief application. In Canada, covered calls are also allowed inside a Tax-Free Savings Account (TFSA), and the CRA has confirmed that option premiums earned inside a TFSA are generally tax-free. Check with your specific broker, as approval requirements vary.

How do I avoid picking a bad covered call stock just because the premium looks high?

High premium is almost always a warning sign, not a gift — the market is pricing in the risk of a large move. Before selling any covered call, check why IV is elevated: is there an upcoming earnings report, a legal issue, or a sector crisis? The OIC advises traders to understand the source of elevated volatility before selling premium into it. If you would not want to own the stock at a 20% lower price, do not sell a covered call on it.