How to Use the Strike Price in Covered Call Writing
Introduction
Covered call writing is one of the most popular options strategies for income-focused investors. But your success hinges on one key choice—the strike price. In this guide, you’ll learn how to pick the right strike price in covered call writing to match your goals and manage risk.
What Is a Covered Call?
A covered call involves:
- Owning 100 shares of a stock
- Selling (writing) a call option against those shares
You collect a premium for selling the call, but you may have to sell your shares at the strike price if the stock rises above it.
How Strike Price Affects a Covered Call
| Strike Price Type | Income Potential | Risk of Assignment | Upside Gain Allowed |
|---|---|---|---|
| In-the-Money | Highest premium | High | Minimal |
| At-the-Money | Medium premium | Moderate | Some |
| Out-of-the-Money | Lower premium | Low | High |
Strategy 1: Use OTM Strikes for Growth + Income
If you want to earn income but also keep the stock if it rises slightly, choose a strike price slightly above the current market price.
Example:
- Stock price: $100
- Strike price: $105 (OTM)
- Outcome: You keep the premium. If stock stays under $105, you also keep your shares.
Strategy 2: Use ATM Strikes for Balanced Return
Choose an ATM strike if you’re okay with either selling your shares or earning moderate income.
Example:
- Stock price: $100
- Strike price: $100
- Outcome: If stock closes above $100, shares get called away.
Strategy 3: Use ITM Strikes for Maximum Income
If you’re okay with giving up the stock and want the highest premium, select an ITM strike price.
Example:
- Stock price: $100
- Strike price: $95
- Outcome: Premium is highest, but shares are likely to be assigned.
Tips for Choosing the Best Strike Price
- Check stock volatility: High-volatility stocks offer more premium.
- Consider your selling target: Use strike prices near your ideal exit price.
- Match expiration to your timeline: Weekly, monthly, or longer covered calls.
- Use delta: A 0.30–0.40 delta strike often balances risk and income.
Real-World Example
You own 100 shares of Apple at $180.
| Strike Price | Premium | Outcome if AAPL closes at $185 |
|---|---|---|
| $175 (ITM) | $9.00 | Shares called, $4 gain + $9 premium |
| $180 (ATM) | $5.50 | Shares called, $0 gain + $5.50 premium |
| $185 (OTM) | $2.75 | Shares NOT called, keep $2.75 + upside |
Conclusion
When writing covered calls, your strike price defines your balance between income and capital gains. Conservative investors may lean ITM for premium, while growth-focused traders often prefer OTM to keep shares longer.
FAQs
Q1. What’s the safest strike price for covered calls?
Out-of-the-money strikes offer safer outcomes if you want to keep your stock.
Q2. Do I lose money if my shares are assigned?
Not necessarily—you sell at the strike price, and still keep the premium.
Q3. Can I roll the strike price to a later date?
Yes, you can buy to close and sell a new covered call at a different strike/expiry.
Q4. How often should I write covered calls?
Many traders use weekly or monthly covered calls, depending on goals.
Q5. Can I write a covered call without owning 100 shares?
No, that would be a naked call—riskier and not allowed in some accounts.
