Once you understand covered calls, the very next question is which strike to sell. There is no single right answer, because the strike is a dial: slide it one way for more income, the other way for more safety. Learning to set that dial is most of the skill.
Think of it like setting the asking price when you rent out a room. Ask a low price and it rents instantly but you earn less freedom. Ask a high price and you keep more control, but collect less rent. The strike works the same way.
The dial between income and safety
A strike close to the current stock price pays a fat premium, because it is quite likely to be reached, so you are more likely to have your shares called away. A strike far above the price pays a thin premium, because it is unlikely to be reached, so you are more likely to keep your shares and their upside. Every covered call choice lives somewhere on that slider between more income and more safety.
A simple way to pick
Many covered-call sellers use delta as a shortcut, since it doubles as a rough chance of being called away. A common comfort zone is a strike around 0.20 to 0.30 delta: enough premium to be worth it, with only a modest chance of assignment. Want maximum income and are happy to sell? Slide nearer the money. Want to keep the stock and just earn a little? Slide further out.
The question that settles it
Before you commit to a strike, ask one thing: would I be genuinely content selling my shares at this price? If the answer is yes, then even the highest-income, near-the-money strike is fine, because assignment just means a sale you approved. If the answer is no, move the dial further out until it becomes yes. Your own comfort, not the biggest premium, sets the strike.
Let your view of the stock nudge the dial
Your read on the stock can fine-tune the choice. If you think it will drift sideways or dip, a strike nearer the money is comfortable, since it probably will not be reached and you bank the bigger premium. If you suspect a strong run is coming and you would hate to cap it, slide further out so you keep more of the upside. You will not predict the move perfectly, but matching the strike to your honest expectation beats picking blindly.
Do not chase the fattest premium for its own sake. The right strike is the one where both outcomes, keeping the shares or selling them, leave you happy. Pick for peace of mind first, income second.
- The strike is a dial: closer to the price pays more premium but risks assignment; further out is safer but pays less.
- Delta is a handy shortcut, with 0.20 to 0.30 a common balance of income and safety.
- Choose the strike where you would be content with either outcome, not simply the one with the biggest premium.
This article is educational and is not investment advice. Options involve risk, including the possible loss of principal. Examples and premiums shown are illustrative and change with the market. Practice with paper trading before committing real money.