RCAT Covered Call Review: Is It Worth It?

Red Cat Holdings has become one of the most talked-about small-cap defense stocks in the market — and for good reason. Revenue up 459% year over year. NATO contracts. Drone swarm acquisitions. A stock that went from $5.77 to $18.78 in less than a year.

For covered call income traders, the question isn’t whether RCAT is an exciting company. The question is whether it generates reliable, repeatable premium income without blowing up your account in the process. Those are two very different standards — and this review addresses both honestly.

I currently run covered calls on RDW and other positions in my income portfolio targeting $20,000-$25,000/month by August 2027. RCAT has been on my radar as a potential addition. This is my complete assessment of whether it belongs in a covered call income strategy — written for traders at every level.

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RCAT at a Glance

What Is Red Cat Holdings?

Red Cat Holdings (Nasdaq: RCAT) is a small-cap defense and drone technology company headquartered in San Juan, Puerto Rico. Founded in 1984 by Jeffrey M. Thompson, the company has pivoted aggressively into the military drone market — specifically autonomous and semi-autonomous drone systems for defense applications.

The flagship product is the Black Widow drone — a combat-proven small unmanned aircraft system used by the US military and allied forces. In early 2026 Red Cat secured new orders for Black Widow drones from a NATO ally, closed the acquisition of Apium Swarm Robotics to expand into drone swarm technology, and announced a strategic partnership with Ukraine’s Spetstechnoexport for multi-domain uncrewed systems collaboration.

The business context matters for covered call traders: RCAT is a genuine defense contractor with real government contracts and real revenue growth — not a speculative concept stock. That distinction affects how the stock behaves and how reliable the premium income is likely to be over time.

RCAT By the Numbers

What These Numbers Mean for Income Traders

If some of those metrics are unfamiliar, here’s what matters for covered call income trading specifically:

Beta (1.68) measures how much the stock moves relative to the broader market. A beta of 1.68 means RCAT moves approximately 68% more than the S&P 500 on average — if the market drops 5%, RCAT might drop 8-9%. For covered call traders, high beta means richer premiums but also more dramatic price swings that can affect your stock position.

Implied volatility (~114%) is the market’s expectation of how much the stock will move over the next 30 days, expressed as an annualized percentage. Most stable large-cap stocks run 20-35% IV. At 114%, RCAT’s options are priced 3-5x richer than typical covered call candidates — meaning you collect far more premium per dollar of stock owned. This is the most important number for income traders. For a complete explanation see our guide on What Is Implied Volatility.

Negative EPS and net income mean the company is still spending more than it earns as it invests in growth. Revenue is growing explosively (+459% year over year) but profitability hasn’t arrived yet. For covered call traders this matters because cash-burning companies are more vulnerable to sharp selloffs on disappointing news — which is why position sizing and earnings management are critical for RCAT specifically.

The 52-week range ($5.77-$18.78) tells you this stock has tripled from its lows and then pulled back significantly. That price history is exactly why the options premiums are so rich — and exactly why active management is required.

The Covered Call Income Scorecard

This scorecard grades RCAT across six criteria that determine how suitable a stock is for covered call income trading. Each category is graded A through F.

Overall Income Grade: B+

RCAT earns a B+ — strong enough to include in an income portfolio but only with specific management rules around earnings and position sizing. The exceptional premium quality drives the grade up. The volatility and earnings risk hold it back from an A.

Why RCAT Is an Income Trader’s Dream

This is where RCAT genuinely stands out from almost every other covered call candidate at this price level.

A trailing implied volatility of 114% puts RCAT in a rare category — stocks where the options premiums are so elevated that even conservative out-of-the-money strikes generate meaningful income. To put that in context: most stable large-cap stocks run IV of 20-35%. A stock at 114% IV is generating options premiums 3-5x richer than a typical covered call candidate.

What the premium math looks like on RCAT:

At ~$12.80 current price with 114% IV, a 30-day covered call at a 20% out-of-the-money strike generates approximately:

Those monthly yields are extraordinary compared to the 1.5-2.5% available on stable large-cap covered call positions. The premium quality alone makes RCAT worth serious consideration for income traders who understand how to manage the volatility.

The caveat: high IV means the market expects large moves — and it’s usually right. That premium is compensation for real risk. You’re being paid well precisely because the stock can move significantly against you. See our guide on Managing Risk in Options Trading for how to size positions accordingly.

Liquidity: Adequate But Not Deep

Liquidity for covered call traders means two things: can you get filled at or near the midpoint when entering, and can you exit quickly if you need to?

RCAT has multiple expiration dates available — weekly, monthly, and quarterly — with reasonable open interest across near-term strikes. For positions up to 2,000-4,000 shares (20-40 contracts) the liquidity is adequate. You’ll be able to enter and exit without significantly moving the market.

Where RCAT’s liquidity falls short is in deeper strikes and longer expirations. Bid-ask spreads on further out-of-the-money strikes can be $0.20-$0.40 per contract — which erodes income meaningfully on larger positions.

Practical guidance: Target the front-month expiration (30-45 days to expiration) at strikes with open interest above 500 contracts. Avoid illiquid outer strikes regardless of how tempting the premium looks. Always use limit orders and target fills at or near the midpoint between bid and ask. For a complete explanation of how to evaluate liquidity on the options chain see our guide on How to Read the Options Chain.

Price Stability: The Biggest Risk Factor

Let’s be direct: RCAT is not a stable stock. A 52-week range from $5.77 to $18.78 means the stock has tripled from its lows and pulled back significantly. A beta of 1.68 means it moves 68% more than the broader market on average.

For covered call income traders this creates a specific risk profile: you generate excellent premium income in normal conditions, but a single bad week for defense stocks, a disappointing earnings report, or a broader market selloff can erase several months of premium income in stock value losses.

The math on a bad scenario:

• You own 2,000 shares at $12.80 ($25,600 position)
• You collect $0.90/share in covered call premium ($1,800/month)
• RCAT drops 20% on earnings disappointment to $10.24
• Stock loss: $5,120
• Premium collected over 3 months: $5,400
• Net position: roughly breakeven — three months of income absorbed by one bad event

This is not a reason to avoid RCAT — it’s a reason to size it appropriately and manage it actively. Both the income opportunity and the volatility risk are real. Both need to be in your decision-making process. For a complete framework on managing volatility risk in covered call positions see our guide on Managing Risk in Options Trading.

Dividend Risk: A Clean Story

RCAT pays no dividend — which is a positive for covered call traders.

Here’s why dividends create complications: when a stock goes ex-dividend, call option holders sometimes exercise their contracts early to capture the dividend payment, forcing assignment before you intended. This is called early assignment risk and it’s a genuine management headache on dividend-paying stocks.

With no dividend, that risk is completely absent. RCAT’s stock price trades purely on growth and momentum — and you’re creating your own income through premium rather than waiting for a dividend payment. For a complete explanation of assignment see our guide on What Is Assignment in Options Trading.

Minimum Capital Requirement: Highly Accessible

At ~$12.80 per share, 100 shares of RCAT costs $1,280. That makes it one of the most accessible covered call candidates in the entire defense sector.

Compare the capital required across defense stocks:

RCAT gives retail traders direct exposure to the defense drone sector at a fraction of the capital required for larger defense contractors. For income traders building a diversified covered call portfolio, low per-share price also means you can run more contracts across more positions with the same total capital — improving diversification and smoothing monthly income variance.

Position sizing by account size:

Key principle: keep RCAT to no more than 20-25% of your total covered call portfolio given the volatility profile. Pairing it with lower-volatility positions gives you better overall income stability month to month.

Earnings Risk: The Most Important Management Rule

RCAT reports earnings on May 7, 2026. This is the single most important date for any current or prospective RCAT covered call position — and it requires a clear plan before that date arrives.

Why earnings are particularly significant for RCAT:

Recent options analysis suggested RCAT options were implying a 12.8% move in share price post-earnings. On a stock trading at $12.80 that’s a potential move to either $14.42 or $11.33 in a single session. When you hold a covered call position — meaning you own the stock — a gap down of that magnitude hits your stock value directly.

This is also where IV crush becomes relevant. Before earnings, implied volatility is elevated even above RCAT’s already-high normal levels. The moment earnings are announced — regardless of outcome — IV collapses and options prices fall sharply. This can actually work in your favor if you’re short the call (the call you sold loses value faster) but it can also create a situation where the stock gaps down AND your call loses value simultaneously.

Your three management options before May 7:

Option A — Close or reduce before earnings Buy back your short calls 2-3 days before May 7 and wait until after the announcement to re-establish the position. You miss the final few days of premium but eliminate gap risk entirely. This is the most conservative approach and the one I’d recommend for anyone new to RCAT.

Option B — Stay with a wider strike If your current covered call strike is well above the current price — $15 or higher with the stock at $12.80 — the 12.8% implied move may not threaten your position. A move from $12.80 to $11.33 (worst case implied) still leaves your $15 strike safely out of the money. Evaluate your specific strike and buffer before deciding.

Option C — Roll out before earnings Close your current position and open a new one at a higher strike and later expiration before May 7, collecting additional premium and buying more buffer. For a complete guide on rolling covered calls see our Covered Call Strategy guide.

My approach: close or significantly reduce before May 7 and re-establish after the dust settles. The income missed in two weeks is far less valuable than protection against a gap down on a 1,000-4,000 share position. For a complete breakdown of how to trade options around earnings see our guide on Best Options Strategy for Earnings.

The Defense Sector Tailwind

One factor that distinguishes RCAT from a typical high-volatility small cap is the genuine fundamental tailwind behind its business. Global defense spending hit a post-Cold War high in 2026. NATO allies are actively procuring drone systems. The US military’s demand for autonomous systems is accelerating. Red Cat’s Black Widow drone is a proven combat-deployed system with documented military contracts.

This matters for covered call traders because it affects the stock’s long-term floor. A speculative company with no revenue can go to zero — wiping out the value of your covered call stock position regardless of premium collected. RCAT has $26.23M in quarterly revenue, 520% production capacity increase, and NATO contracts providing a business foundation that makes a catastrophic collapse structurally unlikely.

The long-term trajectory supports holding the stock — which is a prerequisite for any covered call income strategy. You’re not just renting the shares, you need to be genuinely comfortable holding them through volatility if that’s what the market delivers.

How RCAT Compares to RDW for Covered Call Income

Both stocks sit in a similar tier — high-volatility small-cap defense plays with exceptional premium quality and meaningful volatility risk. The key difference is experience: I have managed RDW through multiple cycles which gives me better judgment on when to roll, when to hold, and when to reduce. RCAT would be a new position requiring a learning period.

My approach: start RCAT at a smaller position size than RDW, run two to three monthly cycles to understand how the premium behaves and how the stock moves, then scale up if the income profile is consistent.

Who Should Consider RCAT for Covered Calls

RCAT is a strong fit for:

• Income traders with $5,000-$50,000 to deploy in a single position
• Traders comfortable with high-volatility small caps who understand the premium-risk tradeoff
• Investors who believe in the defense drone sector long-term and want to hold the stock anyway
• Traders who have a clear earnings management plan and will execute it consistently
• Anyone already running covered calls successfully on similar stocks like RDW or KULR

RCAT is not a fit for:

• Traders who want set-and-forget covered calls — RCAT requires active management
• Accounts where a 20% stock decline would be a serious financial problem
• Traders who haven’t managed covered calls through an earnings event before — learn the mechanics on a more stable stock first
• Anyone who needs the capital to be liquid within 30 days

My Position on RCAT

I’m watching RCAT as a potential addition to my covered call income portfolio with a target entry of 1,000-2,000 shares following the May 7 earnings report. I want to see how the stock reacts before committing capital — a strong report with positive guidance would confirm the revenue growth story and potentially set up a clean entry at a stable price level.

The premium quality at 114% IV is genuinely exceptional and difficult to find in a stock with real business fundamentals behind it. If RCAT continues executing on its defense contracts and the stock finds a stable range following earnings, it could become a meaningful income contributor alongside RDW in my portfolio.

The management discipline required — particularly around earnings and position sizing — is non-negotiable. This is not a stock you buy, sell a call, and ignore for 30 days. It rewards active management and punishes complacency.

FAQs About RCAT Covered Calls

Is RCAT good for covered calls?

Yes — with active management. RCAT’s approximately 114% implied volatility generates exceptional covered call premiums — potentially 6-9% monthly on the position value. The tradeoff is meaningful price volatility with a beta of 1.68 and significant earnings risk around the May 7, 2026 report. Income traders who size the position appropriately, sell strikes well out of the money, and manage actively around earnings can generate substantial monthly income from RCAT covered calls.

What strike price should I use for RCAT covered calls?

Given RCAT’s high volatility, target strikes 15-25% above the current stock price — roughly the 20-30 Delta range. At a current price of $12.80 that means strikes in the $15-$16 range for 30-day expirations. This provides meaningful buffer against the stock’s tendency to make large moves while still generating significant premium at current IV levels. For a complete guide on strike selection see our How to Pick the Right Strike Price guide.

How much premium can you make selling RCAT covered calls?

At current implied volatility levels of approximately 114%, a 30-day RCAT covered call at a 20% out-of-the-money strike generates approximately $0.80-$1.20 per share. On 1,000 shares that’s $800-$1,200 per month — a monthly yield of approximately 6-9% on the position. Actual results vary with market conditions, strike selection, and timing relative to earnings announcements.

What is the earnings risk for RCAT covered calls?

Red Cat Holdings reports earnings on May 7, 2026 with options implying a 12.8% potential move in either direction. For covered call holders this means a potential gap down of $1.50-$2.00 per share in a single session on a disappointing report. The recommended approach is to close or significantly reduce the position 2-3 days before the May 7 announcement and re-establish after the report. See our complete guide on Best Options Strategy for Earnings.

How many shares of RCAT do you need for covered calls?

Each options contract covers 100 shares — that’s the minimum. At $12.80 per share, 100 shares costs $1,280, making RCAT one of the most accessible covered call candidates in the defense sector. A practical starting position for meaningful income generation is 300-500 shares ($3,840-$6,400) which allows for 3-5 contracts while keeping single-stock exposure manageable.

Should I buy RCAT before or after earnings for covered calls?

After earnings is generally the better entry point for a new covered call position. Post-earnings IV crush will reduce option premiums somewhat but eliminates the gap risk of holding through the announcement. A clean entry after earnings — particularly if the report is strong — gives you a stable price level to anchor your position and a full 30-45 days before the next major catalyst.

How does RCAT compare to other defense stocks for covered calls?

RCAT’s 114% implied volatility significantly exceeds most larger defense contractors — Lockheed Martin, Raytheon, and Northrop Grumman typically trade at 20-30% IV with correspondingly lower premiums. The tradeoff is stability: large-cap defense stocks are far more predictable while RCAT can move 10-15% in a week. For income traders comfortable with small-cap volatility, RCAT’s premium quality is exceptional. For traders who prioritize stability, larger defense names are more appropriate.

What is implied volatility and why does it matter for covered calls?

Implied volatility (IV) is the market’s expectation of how much a stock will move over a given period, expressed as an annualized percentage. For covered call sellers, high IV is a direct benefit — it means the options you’re selling are more expensive, so you collect more premium for the same strike and expiration. RCAT’s 114% IV is approximately 3-5x higher than a typical large-cap stock, which is why its covered call premiums are so exceptional relative to its share price. See our complete guide on What Is Implied Volatility.