How Far Out of the Money Should You Sell a Covered Call to Keep Your Shares?

The Short Answer: 5–10% OTM Is the Most Common Starting Point

If your main goal is to keep your shares while still collecting premium, selling a covered call 5% to 10% above the current stock price is where most experienced retail traders start. That range gives the stock room to run before your shares get called away, while still delivering meaningful income. The exact number depends on how much you care about upside versus how much premium you want to collect right now.

This article walks you through the logic, the math, and the tradeoffs so you can pick a strike that fits your actual goal — not just a generic rule.

Why Strike Distance Is Really a Question About Your Priorities

Every covered call is a tradeoff. Move the strike closer to the current price (at-the-money or just slightly out) and you collect more premium — but you face a much higher chance of assignment, meaning your shares get sold at that strike. Move the strike farther away and you keep more upside, but the premium shrinks fast.

The Options Industry Council (OIC) describes this as the core tension in covered-call writing: income now versus participation later. Neither choice is wrong. The right answer depends on three things you need to nail down before you pick a strike:

1. Do you want to hold these shares long-term, or are you okay selling them at a profit? 2. How much premium do you need to make the trade worth your time? 3. How volatile is the stock? A calm utility stock and a high-beta tech name need very different buffers.

Delta: The Single Most Useful Number for Picking Your Strike

Delta measures how much an option's price moves for every $1 move in the stock. For covered-call sellers, delta doubles as a rough probability estimate. A call with a delta of 0.30 has roughly a 30% chance of expiring in the money — meaning about a 30% chance your shares get called away.

Here is a simple delta-to-intent map:

— Delta 0.40–0.50 (at-the-money or just OTM): High premium, high assignment risk. Use this only if you are comfortable selling the stock at that strike. — Delta 0.25–0.35 (moderately OTM): The sweet spot for most income-focused traders who want to keep shares. Decent premium, moderate risk. — Delta 0.10–0.20 (deep OTM): Low premium, low assignment risk. Good for volatile stocks where you want a wide buffer.

CBOE data consistently shows that options with deltas below 0.20 expire worthless the vast majority of the time, which is exactly what you want when share retention is the priority. The tradeoff is that the premium may feel too small to bother with on lower-priced stocks.

Worked Example: Selling a Covered Call on AAPL

Let's say Apple (AAPL) is trading at $195 per share. You own 100 shares and you do not want to sell them — you bought in at $150 and you like the long-term story. But you want to generate some income while you wait.

You pull up the options chain with 30 days to expiration and see three candidates:

— $200 strike (roughly 2.6% OTM, delta ~0.42): Premium is $3.20 per share, or $320 per contract. But with a delta of 0.42, there is about a 42% chance AAPL closes above $200 and your shares get called away.

— $205 strike (roughly 5.1% OTM, delta ~0.28): Premium is $1.75 per share, or $175 per contract. Assignment probability drops to about 28%. You keep your shares unless AAPL rallies more than $10 in a month.

— $215 strike (roughly 10.3% OTM, delta ~0.12): Premium is $0.55 per share, or $55 per contract. Very low assignment risk, but you are only collecting $55 for tying up $19,500 worth of stock for a month.

For a trader who strongly wants to keep AAPL shares, the $205 strike is the practical choice. You collect $175, your breakeven on assignment is $205 (a price you would likely be happy selling at anyway), and you still participate in moderate upside. The $200 strike pays more but puts your shares at real risk. The $215 strike is so conservative the income barely justifies the paperwork.

Note: These are illustrative prices based on typical 30-day implied volatility for AAPL. Always check live options chains before trading.

What Risks Are You Actually Taking? Be Honest With Yourself

Covered calls are considered one of the lower-risk options strategies — FINRA and the SEC both classify them as a defined-risk strategy suitable for most approved options accounts. But lower risk does not mean no risk. Here are the three risks that actually bite retail traders:

1. Assignment at an inconvenient time. Even a deep OTM call can get assigned early if the stock spikes hard. American-style options (which cover most US-listed stocks) can be exercised any time before expiration, not just at expiry. If AAPL jumps 15% on an earnings beat, your $205 call is suddenly deep in the money and you may lose your shares before you can react.

2. Capping your upside on a big winner. This is the hidden cost most new traders underestimate. If you sell the $205 call and AAPL runs to $230, you still sell at $205. You keep the $175 premium but give up $2,500 in gains per contract. Over many trades on a strong stock, this adds up.

3. Tax consequences on assignment. In the US, the IRS treats the sale of shares upon assignment as a taxable event. The premium you collected is added to your proceeds. If you have held the shares less than a year, you may owe short-term capital gains rates. In Canada, the CRA has specific rules about how option premiums affect the adjusted cost base of your shares. Consult a tax professional before your first trade if you are unsure.

None of these risks should stop you from trading covered calls. But knowing them upfront means you pick strikes with clear eyes, not wishful thinking.

How Expiration Length Changes the Math

Strike distance and expiration length work together. A 5% OTM strike on a 7-day option is very different from a 5% OTM strike on a 90-day option.

Shorter expirations (7–21 days): Time decay (theta) works fastest here. You collect less total premium per contract, but you can run more cycles per year and reset your strike more often. Assignment risk is lower simply because the stock has less time to move.

Medium expirations (30–45 days): The OIC and most professional covered-call writers point to 30–45 days to expiration as the optimal zone for theta decay. You get a reasonable premium without giving up too much time for the stock to move against you.

Longer expirations (60–90+ days): Higher total premium, but you are locked in longer. If the stock drops sharply, you are stuck with a call that no longer makes sense but still has time value keeping you from closing it cheaply.

For share-retention focused traders, 30–45 day expirations at 5–8% OTM is the combination that shows up most often in backtested covered-call strategies. It is not a guarantee, but it is a reasonable starting framework.

A Simple Decision Framework Before You Pick Any Strike

Before you sell any covered call, answer these four questions in order:

1. What is my cost basis? If AAPL cost you $150 and it is at $195, you have a $45 cushion. Selling a $200 call still locks in a $50 gain per share if assigned. That might be fine. If you bought at $193, selling a $200 call means you only profit $7 per share on assignment — make sure that is acceptable.

2. Am I okay selling at this strike? Treat every covered call as if you will be assigned. If you would be upset selling at that price, move the strike higher or do not sell the call.

3. Is the premium worth the risk? Divide the premium by the stock price to get a rough yield. A $175 premium on a $19,500 position is about 0.9% for 30 days, or roughly 10.8% annualized. That is a reasonable income target for a large-cap stock. If the premium is 0.1%, it may not be worth the complexity.

4. What does the stock's implied volatility say? High implied volatility (IV) means options are priced expensively — you can sell farther OTM and still collect decent premium. Low IV means you may need to move closer to the money to get paid. Check the IV rank or IV percentile on your broker platform before picking a strike.

What delta should I use for a covered call if I don't want my shares called away?

Most share-retention focused traders target a delta between 0.20 and 0.30, which implies roughly a 20–30% chance of assignment at expiration. Going below 0.20 delta gives you even more safety but the premium often becomes too small to justify the trade. The OIC recommends understanding delta as a probability tool before selecting any strike.

How far out of the money is considered safe for a covered call?

There is no universally safe distance, but 5–10% above the current stock price is the range most retail covered-call traders use as a starting point for share retention. The right buffer depends on the stock's volatility — a high-beta name like NVDA needs more room than a slow-moving stock. Always check the stock's average monthly price range before deciding.

Can I get assigned early on a covered call even if it's out of the money?

Early assignment on an out-of-the-money call is extremely rare because there is no financial reason for the buyer to exercise an option that has no intrinsic value. However, if the stock spikes sharply and your call moves deep in the money, early assignment becomes possible since US-listed equity options are American-style and can be exercised any time. Monitor your positions around earnings and major news events.

Does selling a covered call affect my cost basis for tax purposes?

In the US, the IRS treats covered-call premiums as short-term capital gains in the year the option expires or is closed, not when you sell it. If your shares are assigned, the premium is added to your sale proceeds, which affects your gain calculation. In Canada, the CRA has specific rules about how option premiums interact with the adjusted cost base of your shares, so Canadian investors should review CRA guidance or consult a tax advisor.

What happens if the stock drops after I sell a covered call?

If the stock falls, your covered call will likely expire worthless, and you keep the full premium — that is the good news. The bad news is that the premium only partially offsets your paper loss on the shares, and you still own a stock that is now worth less. Covered calls reduce downside slightly but do not protect you from a large drop the way a put option would.

Is a 30-day or 60-day covered call better for keeping my shares?

For share retention, 30–45 day expirations tend to work best because time decay accelerates in the final weeks, letting you collect premium efficiently without locking in your strike for too long. Shorter cycles also let you reset your strike price more frequently if the stock moves. Most professional covered-call writers, including frameworks discussed by the OIC, point to the 30–45 day window as the optimal theta-decay zone.