Learn/The Wheel Strategy/Lesson 4
Lesson 4 of 5

Selling Covered Calls

Phase 3: Selling Covered Calls

You own 100 shares now. Time to put them to work. A covered call means you sell a call option against shares you already own. If the stock rallies above your call strike, your shares get called away (sold at the strike) and you start the cycle over. If the stock stays below, you keep the shares AND the premium, then sell another call. Either way, you're generating income while holding the position.

Covered Call Breakeven
Breakeven = Cost Basis - Call Premium Collected
Covered Call on AAPL
You were assigned 100 shares of AAPL at $185 (cost basis $182.20 after the put premium). AAPL is now at $183. You sell a $190 call expiring in 30 days for $2.10. If AAPL stays below $190, you keep $210 and your cost basis drops to $180.10. Sell another call next month. If AAPL rallies above $190, your shares are called away at $190. Total profit: ($190 - $180.10) x 100 = $990 plus the $210 call premium. That's $1,200 on a single wheel cycle.

Choosing Your Call Strike

The covered call strike depends on two things: your cost basis and whether you want to keep the shares or exit. This decision matters a lot -- get it wrong and you lock in a loss.

  • ALWAYS sell calls above your cost basis. If your basis is $48.80, sell the $50 call, not the $47 call. You want a profit if shares get called away.
  • Delta of 0.20-0.30 is the starting point -- 70-80% chance you keep the shares and the premium.
  • Want to keep shares? Sell further OTM calls. Less premium, but you're less likely to lose your position.
  • Want to exit? Sell closer to ATM for more premium and higher chance of getting called away at a profit.
  • Same DTE window: 20-45 DTE. Same theta logic as CSPs.
Never Sell Calls Below Your Cost Basis (Usually)
If your cost basis is $48 and you sell a $45 call, you could be forced to sell shares at $45 -- that's a $3/share locked-in loss. The only exception: if you've collected so much premium over multiple cycles that the overall trade is still profitable. But for most traders, the rule is simple: calls above cost basis. Period.

Managing Covered Calls

Same management as CSPs. I close covered calls at 50-75% of max profit and sell a new one. If I sold a call for $2.10 and it's dropped to $0.50, I've captured 76% of the profit. Close it, sell a fresh call, keep the income machine running. Don't sit around for 2 more weeks waiting for the last $0.50.

The short version
  • •Covered calls generate income from shares you already own. Your cost basis drops with every premium collected.
  • •Always sell calls above your cost basis. If called away, you want it to be at a profit.
  • •Target 0.20-0.30 delta to balance keeping shares vs. collecting meaningful premium.
  • •Close at 50-75% profit and sell a new one. Keep the wheel turning.
Quick Check
1/3

Your cost basis on SOFI is $11.20. Which covered call strike ensures a profit if shares are called away?

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