Selling Covered Calls

Phase 3: Selling Covered Calls

Now that you own 100 shares, you enter Phase 3 of the wheel: selling covered calls. A covered call means you sell a call option against shares you already own. If the stock rises above the call strike at expiration, your shares are "called away" (sold at the strike price). If the stock stays below the strike, you keep both the shares and the premium, and you can sell another call.

Choosing Your Call Strike

When selling covered calls in the wheel, your primary goal is to either generate income while holding shares or to exit the position at a profit. The strike you choose depends on your outlook and your cost basis.

• Sell calls above your cost basis — this ensures a profit if shares are called away
• A delta of 0.20-0.30 (70-80% OTM probability) is a common starting point
• If you want to keep the shares: sell further OTM calls for less premium but lower assignment risk
• If you want to exit: sell closer to ATM calls for more premium and higher assignment probability
• Same DTE principle applies: 20-45 DTE captures theta decay efficiently

Managing Covered Calls

Just like with CSPs, many traders close covered calls early at 50-75% of maximum profit. If your $1.80 call has decayed to $0.40, you have captured 78% of the profit. Closing early and selling a new call — perhaps at a different strike or expiration — can compound your income more effectively than waiting for the last few cents of decay.