Better Way to Enter a Covered Call

Covered calls are probably one of my most used trades. There are lots of different ways I enter one. The three most common are:

  • Starting with a Naked or Cash Secured Put.
  • Buying the stock and selling either a 50 or 70 delta call against it 21 to 45 days out.
  • Buying the stock and selling a deep in the money call against it 14 to 45 days out.

Today, I want to discuss selling the deep in the money call and the advantages to that strategy.

First of all, I prefer to use dividend paying stocks for selling covered calls. That way, if the position is going against me I still may receive dividends.

Secondly, I try to only sell covered calls on stocks I actually want to own. Or at least would not mind owning it. Try to avoid the trap of chasing high returns on very volatile stocks that may not be something you want to own long term.

Let’s take a look a PFE as an example. PFE is a stock I like long term and it is currently in a good buy area. It also pays a 3.46% dividend in case I get stuck with it.

Below you see that PFE is trading at 47.55. One way to pick where to sell your call is about 95% of the current stock price. You can play with strikes to see your return. In this example my formula says to sell the closest call I can to $45.17 which is the $45.00 call which is selling for $3.05.

You can see from the next column that this gives me about 6.41% of downside protection and an annualized return of 13.98%. Typically I like to get close to 20% but on a stock I want this is not a bad deal.

You also see I sold the 2/10/23 Call option. You can play with other expirations and strikes focusing on that annualized return number.


Date 1/12/23
Stock$ $47.55 Downside Prot 6.41%
Target CC Sell $45.17 BreakEven $44.50
Option Strike $45.00 Ann Return 13.98%
Option Price $3.05 Potential Gain $0.50
Option Expire 2/10/23 Days: 29


Let’s take a look at a shorter term option.

You see here I used the same Call strike to sell but only got $2.70 for it. You really can’t tell if this is better until you compare the annualized gain. Here it drops to 8.11% which is not as good as the longer term option.  If these were my only two options I would sell the longer term option.


Date 1/12/23
Stock$ $47.55 Downside Prot 5.68%
Target CC Sell $45.17 BreakEven $44.85
Option Strike $45.00 Ann Return 8.11%
Option Price $2.70 Potential Gain $0.15
Option Expire 1/27/23 Days: 15


Depending on when the dividend is paid out and the stock price the position might get assigned early. If so, my annualized return would go up. Actually, I hope to take early assignment which is another reason I try to do these with dividend stocks.

Create your own spreadsheet and start analyzing the returns.


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