Selling call options is one of the oldest and most reliable income strategies in options trading. Whether you own shares and want to enhance returns or are looking for ways to generate premium income, understanding call selling strategies is essential. This guide covers everything from basic covered calls to advanced techniques.
What is Selling Calls?
When you sell a call option, you agree to sell 100 shares of a stock at a specific price (strike price) by a certain date. In exchange, you receive a premium upfront. The strategy works best when you expect the stock to stay flat or rise only moderately.
The call seller's edge: You profit when the stock stays below your strike, moves sideways, or even rises modestly. Time decay works in your favor every day. The risk is missing out on gains above the strike price.
Types of Call Selling Strategies
1. Covered Calls
The most common call selling strategy. You own 100 shares and sell one call against them.
Example: Covered Call on AAPL
You own 100 shares of AAPL at $180. The stock is currently at $185.
- Sell the $195 call (30 DTE) for $2.50
- Premium received: $250
- Maximum profit: ($195 - $180) + $2.50 = $17.50/share ($1,750)
- Breakeven: $180 - $2.50 = $177.50
Outcomes:
- AAPL below $195: Keep shares + $250 premium
- AAPL above $195: Shares called away at $195 + keep $250
2. Poor Man's Covered Call (PMCC)
Instead of buying 100 shares, you buy a deep in-the-money LEAPS call and sell short-term calls against it.
Example: PMCC on MSFT
MSFT trades at $420. A traditional covered call would cost $42,000.
- Buy $350 LEAPS call (18 months out) for $85
- Cost: $8,500 (vs $42,000 for shares)
- Sell $430 call (30 DTE) for $5.00
- Monthly income: $500
3. Naked Calls (Advanced)
Selling calls without owning the underlying stock. This has unlimited risk and requires significant margin. Only for experienced traders.
4. Call Credit Spreads
Sell a call and buy a higher strike call for protection. Limited risk and defined profit.
Strike Selection for Covered Calls
Choosing the right strike depends on your goals:
Conservative Approach (Far OTM)
- Sell calls at 10-15 delta (far out of the money)
- Lower premium but less likely to be called away
- Best for long-term holders who want extra income
Moderate Approach (Slightly OTM)
- Sell calls at 25-35 delta
- Better premium with reasonable protection
- Good balance of income and upside participation
Aggressive Approach (ATM or ITM)
- Sell calls at 40-50 delta (at or in the money)
- Maximum premium but likely to be assigned
- Use when you want to exit the position
When to Sell Covered Calls
Best Market Conditions
- Sideways markets: Ideal for call selling, maximum theta capture
- After strong rallies: Stock may consolidate, calls lose value
- High IV environment: More premium available
Timing Considerations
- 30-45 DTE: Optimal balance of premium and time decay
- Weekly options: More frequent income but more management
- Avoid earnings: IV crush can work against you if stock moves
When NOT to Sell Covered Calls
- When you expect significant upside (you cap your gains)
- Just before expected catalysts (product launches, FDA approvals)
- When you want to exit at current prices (just sell the shares)
Managing Covered Call Positions
Taking Profits Early
- 50% profit rule: Close when call has lost 50% of value
- 21 DTE rule: Close and roll to next month around 21 DTE
- Reinvest premium: Use profits to open new positions
When the Stock Rises
If the stock approaches or exceeds your strike:
- Let it be called: Accept the profit and move on
- Roll up and out: Buy back call, sell higher strike next month
- Buy back the call: Accept the loss if you want to keep shares
Example: Rolling Up and Out
You sold the AAPL $195 call for $2.50. AAPL is now at $198 with 5 days left.
- The $195 call is now worth $4.50
- Buy back $195 call for $4.50 (loss of $2.00)
- Sell $205 call (next month) for $4.00
- Net credit on roll: -$0.50
- New strike gives more upside room
When the Stock Falls
If the stock drops significantly:
- Close early for profit: Buy back cheap call, free up margin
- Roll down: Close current call, sell lower strike for more premium
- Wait it out: Let call expire, sell new one at same or lower strike
Covered Call Income Expectations
What can you realistically expect from covered calls?
Typical returns: Most covered call strategies generate 1-3% monthly premium on the stock value. This translates to 12-36% annually in premium income alone, plus any stock appreciation up to the strike.
- Conservative (10 delta): 0.5-1% monthly
- Moderate (25 delta): 1-2% monthly
- Aggressive (40 delta): 2-4% monthly
Best Stocks for Covered Calls
Ideal Characteristics
- Moderate volatility: 25-50% IV for good premium
- Liquid options: Tight bid-ask spreads
- Stable price action: Not too volatile but not dead either
- Stocks you want to own: In case you are not called away
Popular Covered Call Stocks
- Tech giants: AAPL, MSFT, GOOGL
- Dividend payers: KO, PG, JNJ
- ETFs: SPY, QQQ, IWM
- REITs: O, AGNC, NLY
Tax Considerations
Covered calls have specific tax implications:
- Premium received: Short-term capital gain when call expires
- Called away: Premium added to sale price of stock
- Holding period: ITM calls may affect long-term capital gains status
- Consult a tax professional: Rules are complex and change
Track Your Covered Call Performance
Pro Trader Dashboard tracks all your covered call trades automatically. See your premium income, assignment rate, and total returns including stock appreciation.
Common Covered Call Mistakes
- Selling calls on bad stocks: Do not hold a stock just because you want to sell calls
- Selling too close to the money: Getting called away repeatedly
- Not having an exit plan: Know what to do if the stock moves against you
- Ignoring earnings: Stock can gap past your strike
- Overtrading: Constantly rolling and adjusting eats into profits
Advanced Covered Call Strategies
The Collar
Sell a call and buy a put for downside protection. Limits both gains and losses.
Ratio Writes
Sell more calls than you have shares covered. Increases income but adds risk.
Diagonal Spreads
Combine calls at different strikes and expirations for more sophisticated positioning.
Summary
Selling calls is a time-tested income strategy that works particularly well for stocks you already own. Covered calls provide steady premium income while you wait for price appreciation. Focus on quality stocks, choose appropriate strikes for your goals, and have a clear management plan. Start conservatively and adjust your approach as you gain experience.
Want to explore more? Learn about selling puts for income or discover the complete wheel strategy that combines both.