Revisiting Covered Calls and Protective Puts: A Tale of Two Strategies

14 Pages Posted: 19 Mar 2021 Last revised: 17 May 2022

See all articles by Bryan Foltice

Bryan Foltice

Butler University - Lacy School of Business

Date Written: March 28, 2022


This paper examines the historical risk-adjusted returns of two hedging strategies designed to minimize downside market risk: Protective-puts and covered-calls. Using US market data from 1993 to 2020, we find that covered-call strategies outperform the buy-and-hold strategy on a raw and risk-adjusted basis over the entire sample and these excess returns appear to be consistent over time. After factoring in transaction/trading costs and income tax implications, the returns for the out-of-the-money call options maintain both significantly higher raw and risk-adjusted returns than the buy-and-hold strategy. We also find the opposite results hold for the protective put strategy: This strategy not only significantly underperforms the buy-and-hold strategy from a raw and risk-adjusted return standpoint, it actually significantly increases the probability of incurring losses each month. Finally, we evaluate the overall utility of various covered call strategies for loss averse investors, using the standard prospect theory utility function. Here, we find that out-of-the-money covered-call options yield the highest utilities for investors with less than average loss aversion, while in-the-money covered call options become more favorable as loss aversion increases.

Keywords: covered calls; trading strategies; protective puts; prospect theory

JEL Classification: G02, G14

Suggested Citation

Foltice, Bryan, Revisiting Covered Calls and Protective Puts: A Tale of Two Strategies (March 28, 2022). Available at SSRN: or

Bryan Foltice (Contact Author)

Butler University - Lacy School of Business ( email )

Indianapolis, IN 46208
United States

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