Master the art of generating income from stocks you already own with our comprehensive guides and strategies
When: Your stock is approaching the strike price before expiration and you want to keep the shares.
How: Buy back your current call option and sell a new one with a higher strike price and later expiration date.
Benefit: Collect additional premium while giving the stock more room to grow.
When: Your stock has a big up day with increased implied volatility.
How: Sell covered calls when the stock rallies, as option premiums are typically higher during these times.
Benefit: Maximize premium income by timing your entries on strong market days.
When: You want fewer trades and bigger premiums per transaction.
How: Focus on quarterly LEAPS expirations (March, June, September, December) instead of monthly.
Benefit: Higher absolute premium amounts with less frequent management.
When: Your stock has an upcoming earnings announcement.
How: Either avoid selling calls before earnings, or sell calls expiring after earnings to capture elevated premium.
Benefit: Prevent shares from being called away on a surprise earnings pop.
When: Your stock pays dividends.
How: Sell calls with strikes and expirations that allow you to hold through the ex-dividend date.
Benefit: Collect both the dividend AND the option premium for double income.
When: You want downside protection in addition to income.
How: Combine covered calls with buying protective puts on the same stock.
Benefit: The call premium helps offset the cost of the protective put, creating a collar with limited risk.
Many professional option traders sell calls at the 30-delta strike. This means there's roughly a 30% chance the option finishes in-the-money. This strike typically offers a good balance between premium income and upside potential.
Options decay accelerates as expiration approaches, but the fastest decay happens in the last 30 days. Selling options with 45-60 days to expiration captures significant time decay while giving you flexibility to roll or adjust.
Every time you collect premium, you're effectively lowering your cost basis in the stock. If you bought AAPL at $200 and collected $800 in premiums over time, your adjusted basis is $192. This helps you understand your true profit potential.
If your call option is nearly worthless (trading for $0.05 or less) with only days left, consider letting it expire instead of buying it back. The commission and bid-ask spread might cost more than the remaining value.
If you believe a stock will double or triple, don't sell covered calls on it. You'll cap your gains and kick yourself when it runs higher. Covered calls are for stocks you like, not stocks you love.
New traders often sell at-the-money or very close strikes to maximize premium, then watch their shares get called away immediately. Leave yourself breathing room — aim for 5-15% out-of-the-money strikes.
Selling a call right before earnings is risky. If the company beats estimates and the stock pops 20%, your shares are gone. Always check the earnings calendar before selling calls.
Before you sell a call, know what you'll do if the stock approaches your strike. Will you let it get called away? Roll it up and out? Buy it back? Have a plan before you need it.
Pharmaceutical companies awaiting FDA approval, tech companies with product launches, etc. These can gap 50%+ overnight. If you must hold them, avoid selling calls around major catalysts.
Not all stocks are created equal for covered call writing. Here's what to look for:
Higher volatility = higher premiums. Look for stocks with implied volatility (IV) between 30-60%. Above 60% often means the stock is too risky and unpredictable.
Stick to stocks with tight bid-ask spreads and decent volume. If the spread is $0.50 wide on a $2.00 option, you're losing 25% to slippage. Aim for spreads under $0.10.
The best covered call candidates are stocks you're comfortable owning long-term: AAPL, MSFT, AMD, NVDA, JPM, etc. Don't buy a stock just to sell calls on it.
Covered calls work best when stocks grind higher slowly. Avoid stocks in free-fall (catch falling knives) or parabolic rockets (you'll get assigned immediately).
If the stock pays a dividend, you get three income streams: dividend, option premium, and potential capital gains. Triple income!
Disclaimer: We are not tax advisors. Always consult a CPA or tax professional about your specific situation. That said, here are general concepts to be aware of:
If you've held a stock for less than a year and it gets called away, you'll pay short-term capital gains tax (taxed as ordinary income). If you've held it over a year, you qualify for long-term capital gains rates (typically 0%, 15%, or 20% depending on income).
The premium you receive from selling a covered call is not taxed immediately. Instead, it's added to your stock's cost basis (if the option expires) or affects your capital gain calculation (if the stock is called away).
If your stock gets called away at a loss and you buy it back within 30 days, the IRS may disallow the loss deduction under wash sale rules. Be mindful of this when repurchasing shares.
To avoid disrupting the holding period for long-term capital gains, your covered calls must be "qualified." Generally, this means selling calls more than 30 days out with strikes no lower than specific thresholds. Check IRS Publication 550 or ask your CPA.
Keep detailed records of every trade: dates, strikes, premiums received, assignment dates, etc. Your broker's 1099 forms should have most of this, but double-check everything.
Use our free calculator to analyze real-time covered call opportunities on any stock
Fidelity, TD Ameritrade, Interactive Brokers, and E*TRADE all have excellent options platforms
"The Covered Call Strategy" by J.W. Labuszewski and "Trading Options for Dummies" by Joe Duarte
Track implied volatility, option chains, and earnings dates on sites like Barchart or Market Chameleon
Join option trading communities on Reddit (r/options, r/thetagang) to learn from experienced traders
Take free courses from CBOE, Investopedia, or your broker to deepen your options knowledge
Strike Price: The price at which your shares can be called away (sold) if the option is exercised.
Premium: The income you receive for selling the option. This is yours to keep no matter what happens.
Expiration Date: The date when the option contract ends. Monthly options expire on the third Friday of each month.
In-the-Money (ITM): When the stock price is above the strike price. Your shares are likely to be called away.
Out-of-the-Money (OTM): When the stock price is below the strike price. You'll likely keep your shares.
At-the-Money (ATM): When the stock price equals (or is very close to) the strike price.
Assignment: When the option buyer exercises their right to buy your shares at the strike price. You sell the shares.
Implied Volatility (IV): The market's expectation of future stock price movement. Higher IV = higher premiums.
Delta: The probability that an option will finish in-the-money. A 30-delta call has roughly a 30% chance of being assigned.
Theta: The rate of time decay. Options lose value as expiration approaches, and theta measures this decay.
Rolling: Closing your current option position and opening a new one (usually with a later expiration or different strike).
Bid-Ask Spread: The difference between what buyers will pay (bid) and sellers want (ask). Narrower spreads are better.
Use our free calculator to analyze covered call opportunities on any stock with real-time market data
Get Started FreeDisclaimer: This tool is for educational purposes only and does not constitute financial advice. Options trading carries significant risk and may not be suitable for all investors. Past performance does not guarantee future results. Consult with a licensed financial advisor before making investment decisions.