How Far Out of the Money Should Your Covered Call Strike Be If You Want to Keep Your Shares?

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

If you want to keep your shares, most covered-call sellers aim for a strike price that is 5% to 10% above the current stock price. That range gives you a reasonable premium while leaving a buffer before the stock gets called away. The exact distance depends on how much premium you need, how volatile the stock is, and how attached you are to those shares.

This is not a one-size-fits-all number. A 5% OTM strike on a slow-moving utility stock is very different from a 5% OTM strike on a high-volatility name like NVDA. The rest of this article walks you through how to find the right distance for your specific situation.

Why Strike Distance Is Really a Trade-Off Between Premium and Safety

Every covered call forces you to choose between two things: collecting more premium now or keeping a wider buffer to hold your shares. The further out of the money your strike is, the lower the premium you collect — but the less likely you are to lose your shares at expiration.

Think of it like a sliding scale. A strike that is only 2% above the current price pays you more cash upfront, but the stock only needs a small move to blow past it and trigger assignment. A strike that is 15% above the current price is very unlikely to get hit, but you might collect so little premium that the trade barely makes sense.

The Options Industry Council (OIC) describes this as the core tension in covered-call writing: yield versus protection. Neither extreme is wrong — it depends on your goal.

How to Use Delta to Measure Assignment Risk

Delta is the single most useful number for sizing your strike distance. For a call option, delta runs from 0 to 1.00. A delta of 0.30 means the option has roughly a 30% chance of expiring in the money — and therefore roughly a 30% chance of your shares being called away.

Most covered-call sellers who want to keep their shares target a call delta between 0.20 and 0.35. That range typically corresponds to a strike that is 5% to 10% OTM on a stock with average volatility. You can find the delta for any option in your brokerage's option chain — it is usually displayed right next to the bid and ask price.

If you want an even lower chance of assignment, look for strikes with a delta below 0.20. Just know that the premium will be thin. FINRA reminds retail investors that options involve risks including the possibility of losing the entire premium paid, and that covered-call writers face the risk of having shares called away at the strike price regardless of how much higher the stock has moved.

Worked Example: Selling a Covered Call on AAPL

Let's say you own 100 shares of Apple (AAPL) and the stock is trading at $210. You want to collect some income but you really do not want to sell your shares.

Here are three strike choices for a 30-day expiration:

• $215 strike (about 2.4% OTM) — delta roughly 0.40, premium approximately $3.20 per share ($320 per contract). High income, but a moderate rally puts you at risk of assignment.

• $220 strike (about 4.8% OTM) — delta roughly 0.28, premium approximately $1.75 per share ($175 per contract). Middle ground. AAPL needs to climb nearly 5% in 30 days to threaten your shares.

• $230 strike (about 9.5% OTM) — delta roughly 0.12, premium approximately $0.55 per share ($55 per contract). Very low assignment risk, but the income is minimal.

If keeping your AAPL shares is the priority, the $220 or $230 strike makes more sense. The $215 strike pays well, but a single strong earnings reaction or market rally could push AAPL past it and cost you your position.

Note: These are illustrative prices based on typical implied-volatility levels for AAPL. Always check live option chains in your brokerage before placing a trade.

What Happens If the Stock Rallies Past Your Strike? Honest Risk Talk

This is the risk that does not get enough attention. If AAPL in the example above jumps to $235 before expiration, your $220 call will almost certainly be assigned. You will sell your 100 shares at $220 — not $235. You keep the $175 premium you collected, but you miss out on $1,500 in additional gains ($15 per share × 100 shares).

That missed upside is called opportunity cost, and it is the real price of selling covered calls. You are not losing money in the traditional sense — you sold at a profit — but you capped your gain at the strike price plus the premium received.

There are a few ways to manage this before expiration. You can buy back the call (close the position) if the stock starts moving hard toward your strike. This costs you money but frees your shares. You can also roll the call — buying back the current contract and selling a new one at a higher strike or later expiration. Rolling is a common tactic, but the SEC notes that rolling does not guarantee you avoid assignment, especially if the option is deep in the money close to expiration.

Early assignment is also possible on American-style options (which covers most individual US stocks). It is rare but more likely right before an ex-dividend date. The OIC has detailed guidance on early assignment risk that every covered-call writer should read before their first trade.

Does Expiration Length Change How Far OTM You Should Go?

Yes, and it matters more than most beginners expect. A stock has more time to move when you sell a 60-day option versus a 14-day option. That means a 5% OTM strike on a 60-day call carries more assignment risk than the same 5% OTM strike on a 14-day call.

Shorter expirations — often called weeklies or near-term monthlies — let you stay closer to the current price while still keeping assignment risk low, because the stock has less time to travel that distance. Many experienced covered-call sellers prefer 21-to-45-day expirations as a balance between premium decay (theta) and manageable risk.

If you go further out in time, consider going further OTM to compensate. A rough rule of thumb: add about 1–2 percentage points of OTM distance for every additional 30 days of expiration you take on, assuming similar volatility conditions.

Tax Angle: How Strike Distance Can Affect Your Holding Period

US investors need to be aware of a specific IRS rule. When you sell a covered call that is deep in the money — generally defined as a strike below the current stock price, or in some cases at a strike that is not considered 'qualified' — the IRS can suspend your holding period on the underlying shares for long-term capital gains purposes. This is covered under IRS Publication 550, Investment Income and Expenses.

Selling an out-of-the-money covered call typically does not trigger this holding-period suspension, which is one more reason to stay OTM if you care about long-term tax treatment on your shares. However, tax rules are specific and can depend on your cost basis, how long you have held the shares, and the exact strike chosen.

Canadian investors face similar considerations under CRA rules around option premiums and adjusted cost base. Both US and Canadian traders should consult a qualified tax professional before making decisions based on tax treatment alone. This article is not tax advice.

A Simple Decision Framework Before You Pick a Strike

Run through these four questions before you sell any covered call:

1. How much do I care about keeping these shares? If the answer is 'a lot,' start at 7–10% OTM and check the delta. Aim for 0.20 or below.

2. What is the implied volatility environment? High-IV stocks (like NVDA during earnings season) can move 10% in a week. On those names, 10% OTM may still carry real assignment risk. Low-IV stocks may need you to go closer to the money just to collect a worthwhile premium.

3. What is my income target? If you need a specific monthly yield, work backward from that number to find the strike that delivers it — then decide if the assignment risk at that strike is acceptable.

4. Do I have an exit plan? Know in advance at what stock price you will buy back the call to protect your shares. Having that number ready before the trade removes emotion from the decision.

There is no universally correct strike distance. The right answer is the one that fits your income goal, your attachment to the shares, and the volatility of the specific stock you own.

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

Most covered-call sellers who want to keep their shares target a call delta between 0.20 and 0.30. A delta of 0.20 means roughly a 20% chance the option expires in the money and your shares get called away. You can find the delta for any strike in your brokerage's option chain, usually displayed next to the bid and ask.

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

There is no universally 'safe' distance, but 5% to 10% above the current stock price is the most common range for investors who want to hold their shares. On high-volatility stocks, you may need to go 10% to 15% OTM to get the same level of protection. Always check the delta and the stock's recent price range before deciding.

Can I lose my shares even if I sell an out-of-the-money covered call?

Yes. If the stock rallies past your strike price before expiration, your shares will almost certainly be called away through assignment. You keep the premium you collected, but you sell your shares at the strike price, not the higher market price. You can reduce this risk by buying back the call before expiration if the stock moves toward your strike.

Does selling a covered call affect my long-term capital gains holding period?

It can, depending on the strike you choose. The IRS can suspend your holding period on the underlying shares if you sell a covered call that is considered deep in the money, as outlined in IRS Publication 550. Selling an out-of-the-money covered call generally does not trigger this rule, but you should verify your specific situation with a tax professional.

Should I sell a weekly or monthly covered call to protect my shares?

Shorter expirations like weeklies give the stock less time to reach your strike, which lowers assignment risk for the same OTM distance. Many experienced sellers prefer 21-to-45-day expirations to balance premium income with manageable risk. If you use longer expirations, consider going further out of the money to offset the extra time the stock has to move.

What happens if my covered call goes in the money before expiration?

If your call goes in the money, you face a higher risk of assignment, especially near expiration or before an ex-dividend date. You have three main choices: let it ride and accept possible assignment, buy back the call to close the position, or roll the call to a higher strike or later expiration date. The Options Industry Council (OIC) provides detailed guidance on managing in-the-money covered calls.