When you're holding stock positions that have dropped significantly in value, it can feel like you're stuck waiting for a recovery. But what if there was a way to generate consistent income from these positions while waiting for the stock to rebound?
This article explores a powerful strategy modification that allows you to collect option premium from losing positions without additional risk. By selling covered calls at your original purchase prices instead of your averaged cost basis, you can transform underwater holdings into income-generating assets.
We'll examine a real-world example using NVAX stock that declined more than 50%, demonstrating how to structure multiple covered call contracts at different strike prices while maintaining downside protection through cash-secured puts.
When holding multiple lots of shares purchased at different prices, the traditional approach focuses on the averaged cost basis. This method has significant drawbacks for income generation.
Many traders calculate their average cost basis across all shares and then target that price for covered call strikes. While this approach makes accounting sense, it leaves money on the table for option sellers.
When you have shares purchased at $19, $21, and $24.50, averaging those together might give you a cost basis around $28. Selling covered calls at $28 when the stock is trading at $17 generates minimal premium because the strike is so far out of the money.
Position: 300 shares NVAX with averaged cost basis of $28
Stock Price: $17.20
Strategy: Sell 3 covered calls at $28 strike
Premium Collected: $10 per contract = $30 total
Weekly Income: Less than $5 per week
Key Insight: Targeting strikes at your averaged cost basis when the stock has dropped significantly results in minimal option premium because those strikes are far out of the money. The market is telling you there's little chance the stock reaches those levels in a week.
Instead of focusing on averaged cost basis, consider each lot of shares separately. This strategy shift allows you to collect significantly more premium while maintaining the same breakeven on assigned shares.
Rather than selling three covered calls at your averaged cost basis of $28, you sell individual contracts at the actual purchase price of each lot:
Selling covered calls closer to the current stock price generates substantially more premium. These strikes are closer to at-the-money, which means higher extrinsic value and better income for option sellers.
Same Position: 300 shares NVAX
Stock Price: $17.20
Modified Strategy:
Total Premium: $94 collected
Premium Increase: 213% more than traditional approach
The critical question with this strategy is: what happens if your shares get called away? Understanding the assignment scenario shows why this approach doesn't increase your risk.
When you sell a covered call at your original purchase price, assignment means you're selling the shares for exactly what you paid. This is a neutral outcome on the stock itself—you're not taking an additional loss.
Assignment Example: If your $19 covered call gets assigned, you sell 100 shares at $19. Since you purchased those shares at $19, this is a wash on the stock position. However, you keep all the premium collected from that option contract and any previous cycles.
The profit in this strategy comes from the accumulated option premium, not from stock appreciation. Every week you collect premium, you're generating income regardless of the stock's direction.
If you've collected $94 in premium per week for several weeks before assignment, that's genuine profit even if the stock price hasn't moved. This is the essence of income-focused option selling.
Some traders worry about shares purchased at higher prices (like the $24.50 lot in our example). The reality is those shares are already showing an unrealized loss. This strategy doesn't change that.
What it does is generate income from the other lots while you wait for the stock to recover. The shares purchased at $24.50 can continue selling covered calls at that strike (collecting smaller premium) or you can manage them separately once the stock price approaches that level.
This strategy becomes even more powerful when combined with cash-secured puts on the same ticker. Playing both sides of the stock price creates income opportunities regardless of market direction.
While managing covered calls on your existing shares, you can simultaneously sell cash-secured puts at lower strike prices. This bilateral approach ensures one side wins every week.
Covered Call Side (Existing Shares):
Cash-Secured Put Side (New Potential Position):
The beauty of bilateral trading is that you can't lose on both sides simultaneously:
Critical Advantage: One side of your bilateral trade is always collecting premium. This creates consistent weekly income regardless of stock direction—the core principle of the wheel strategy and continuous cashflow systems.
Looking at actual trades executed on NVAX shows the practical application and results of this strategy.
The position consisted of 300 shares of NVAX with purchases at three price points: $19, $21, and $24.50. Previously, three covered calls were sold at $28 strike for $30 total premium, which had to be bought back for $12, netting just $18 in profit.
After closing the unprofitable $28 strike calls, three new covered calls were opened at the individual purchase prices:
| Strike Price | Expiration | Premium Collected | Original Cost Basis |
|---|---|---|---|
| $19.00 | December 16 | $61.00 | $19.00 |
| $21.00 | December 16 | $26.00 | $21.00 |
| $24.50 | December 16 | $7.00 | $24.50 |
Total premium collected from the three covered calls: $94.00 for one week of exposure. Combined with the buyback profit from the previous position ($18), the total profit was approximately $82 after closing the initial trade.
Compared to the original strategy that was generating only $10 per week at the $28 strike, this represents an 840% improvement in weekly income generation.
Tracking these trades accurately requires proper cost basis management. The demonstration showed recording all three new option positions in the MyATMM platform:
After entering these trades, the premium tracking showed an increase from $140 previously collected to $223 total, demonstrating how systematic tracking helps visualize cumulative income generation from option strategies.
This strategy isn't limited to NVAX—it can be applied to any stock where you hold multiple lots at different price points and the stock has declined from your purchase prices.
Look for positions in your portfolio with these characteristics:
This strategy scales to any account size. If you only have 100 shares purchased at one price, you can still sell a covered call at that purchase price rather than holding out for higher strikes. The principle remains the same regardless of position size.
For larger accounts with multiple hundred-share lots at the same price, you can sell multiple contracts at that strike, multiplying the premium collected.
Pro Tip: If you're consistently applying this strategy from the beginning of a position, you eliminate the problem entirely. When you get assigned on a cash-secured put at $16, immediately sell a covered call at $16 rather than waiting for the stock to reach some higher price. This maximizes premium collection from day one of share ownership.
Understanding both the benefits and limitations of this approach helps you implement it effectively within your overall trading plan.
While this strategy offers significant advantages, keep these factors in mind:
This approach may not be suitable when:
Here's a practical workflow for implementing this strategy on your own positions:
Open your cost basis tracking system (like MyATMM) and identify positions with multiple lots purchased at different prices where the current stock price is below at least some of your purchase prices.
For each identified position, review the option chain for strikes matching your actual purchase prices. Check:
Determine how much premium you can collect by selling covered calls at each of your purchase prices. Compare this to what you'd collect by selling at your averaged cost basis to see the improvement.
Place sell-to-open orders for covered calls at the strikes matching your purchase prices. Consider using limit orders between the bid and ask to improve your fill price.
Record each option sale in your tracking system, noting:
As expiration approaches, decide whether to:
If options expire worthless or you buy them back, immediately sell new covered calls for the next expiration cycle, continuing the income generation.
Managing multiple covered call contracts at different strikes requires accurate tracking of each position and its associated premium. This is where purpose-built tools become valuable.
MyATMM tracks your actual purchase prices for each lot of shares, not just an averaged cost basis. This visibility makes it immediately clear which strike prices match your actual purchase points, enabling better decision-making for covered call strikes.
Every option trade you enter—whether covered calls, cash-secured puts, or assignments—automatically adjusts your cost basis and premium tracking. You can see at a glance how much total premium you've collected on a ticker across all trades.
When you have active cash-secured puts, MyATMM shows your "proposed cost basis"—what your cost basis would be if those puts get assigned. This helps you plan your next covered call strikes before you even own the shares.
Before placing a trade, you can see exactly what happens to your position if assignment occurs. This removes guesswork and helps you understand your risk and reward before committing capital.
Stop leaving money on the table with inefficient covered call strikes. MyATMM helps you identify the optimal strikes based on your actual purchase prices, not just averaged cost basis.
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When you're holding stock positions showing unrealized losses, you have a choice: wait passively for recovery or actively generate income while waiting. The strategy of selling covered calls at your original purchase prices rather than averaged cost basis provides a systematic approach to the latter.
By recognizing that each lot of shares can be managed independently with its own covered call, you unlock significantly higher premium collection. The $94 versus $10 weekly premium example from NVAX demonstrates the practical impact—that's an additional $336 per month from the same 300 shares.
The key psychological shift is recognizing that assignment at your purchase price isn't a loss—it's a neutral outcome on the stock itself while keeping all collected premium as profit. This reframes how you think about underwater positions: they're not dead money; they're collateral for generating weekly cashflow.
Combined with bilateral trading through cash-secured puts at lower strikes, this approach creates an income system that profits regardless of stock direction. One side or the other wins every week, and when managed systematically across multiple tickers, the law of large numbers smooths your income stream over time.
Whether you're dealing with NVAX down 50%, or any other position showing unrealized losses, this strategy modification can transform those holdings from sources of frustration into reliable income generators while you wait for eventual recovery.
Final Thought: The most successful option income traders don't fear stock price declines—they have systematic strategies in place that generate cashflow in any environment. Selling covered calls at your actual purchase prices rather than averaged strikes is one such strategy that turns conventional thinking upside down while producing superior results.
Options trading involves substantial risk and is not suitable for all investors. Past performance does not guarantee future results. The strategies discussed in this article are for educational purposes only and should not be considered financial advice. Selling covered calls caps your upside potential, and there is always risk of loss when holding equity positions. The premium collected does not eliminate the risk of the underlying stock declining in value. Always consult with a qualified financial advisor before making investment decisions, and never trade with money you cannot afford to lose.