Covered calls
A covered call is a promise to sell 100 shares you own at the strike if asked. It is the second half of the Wheel and the most common way shares earn income while you hold them.
The mechanics
Own at least 100 shares. Sell to open one call per 100 shares at a strike above the current price and collect the premium. At expiry:
- Stock below the strike: the call expires worthless; you keep the shares and the premium and can sell another.
- Stock above the strike: your shares are called away at the strike. You keep the premium plus the gain up to the strike, and give up any gain above it.
- You close early: buy the call back, usually once most of the premium has decayed or to avoid losing the shares before an ex-dividend date.
Strike choice after assignment
If the shares came from an assigned put, your true cost basis is the put strike minus every premium you have collected on that stock. Selling a call below that basis locks in a loss if the shares are called away; selling at or above it means being called away is a win. When the stock has dropped well below your basis, a call at your basis may pay almost nothing. The choice then is to wait, accept a small premium far out of the money, or take the loss consciously.
The upside you give up
A covered call caps your gain at the strike. On a stock that jumps 20 percent on earnings you keep the premium and the gain to the strike, and watch the rest go to the call buyer. That is the trade: steady premium in exchange for the big up-moves. It suits stocks you expect to drift, not stocks you expect to run.
Dividends and early assignment
An in-the-money call is likely to be exercised the day before the ex-dividend date if the dividend is worth more than the remaining time value. If you want the dividend, roll or close the call before then.
Tracking a campaign
The number that matters is cumulative: all put premium plus all call premium plus dividends, against the shares' cost. A campaign can show a paper loss on the shares and still be well ahead on the whole. WheelCopilot's Wheel Tracker keeps that running total per stock and shows each contract's buy-back value and loss risk.
Frequently asked questions
What strike should I sell a covered call at?
Most wheel traders sell at or above their cost basis after premiums, 20 to 45 days out, often around 0.20 to 0.30 delta. Lower strikes pay more but are called away more often.
What happens to my shares when a covered call is assigned?
They are sold at the strike price. You keep the premium and the proceeds. The gain or loss on the shares is realized at the strike.
Is a covered call the same as a poor man's covered call?
No. A poor man's covered call uses a long-dated, deep in-the-money call in place of the shares. Its risk and tracking differ: the long call is an asset that decays and should be shown as a holding, not as premium income.
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