How to Choose a Covered Call Strike Price?

Choosing a strike price is one of the most important decisions in a covered call.

The covered call strike price determines where shares may be sold if assigned. It also affects the covered call premium, available upside, and potential covered call assignment risk.

For advisors, the decision starts with one question: At what price would the client be comfortable selling the shares?

For a broader explanation of covered calls, see AcuBooth's Covered Call Strategy guide.

What Is A Covered Call Strike Price?

A covered call strike price is the price at which the call buyer can purchase the underlying shares if the option is exercised.

For the call seller, the strike establishes the price at which the shares may be sold through assignment. The strike also affects the option's premium, moneyness, and relationship to the current stock price.

Covered Call Basics

The strike should therefore be considered alongside expiration and premium. Fidelity also identifies moneyness, time, and liquidity as factors when selecting an option strike.

How Does Strike Price Affect A Covered Call?

The relationship between the stock price and strike creates different trade-offs.

A lower strike generally provides more premium but leaves less room for appreciation. A higher strike generally provides more upside room while offering less premium.

ITM Vs. ATM Vs. OTM Covered Calls

ITM vs. ATM vs. OTM covered calls therefore depends on the client's objective.

An investor willing to sell shares at a lower price may consider an ITM strike. An investor seeking greater upside participation may prefer an OTM strike.

Is A Higher Or Lower Strike Price Better?

Neither strike is universally better.

The best strike price for covered calls depends on the desired selling price, premium, expiration, volatility, and willingness to accept assignment. Fidelity similarly describes strike selection as an individual decision based on the investor's objectives and willingness to sell.

How Far Out Of The Money Should A Covered Call Be?

There is no universal distance for an OTM strike.

When considering how far out of the money a covered call should be, investors can compare the strike with the current share price, available premium, delta, expiration, volatility, and desired upside room.

What Delta Should You Use For Covered Calls?

Delta measures how much an option's price is expected to change for a $1 change in the underlying, all else equal.

For covered call strike selection, delta can help compare contracts with different strikes. It can also provide information about how closely a strike relates to the current share price.

Delta should not be treated as an exact assignment probability. Assignment depends on several factors, including option moneyness, time remaining, dividends, and market conditions.

What Delta Is Best For Covered Calls?

No single delta is appropriate for every investor.

When comparing strikes, consider:

• Delta: Compare the relative positioning of available strikes.

• Premium: Review the amount received for selling the call.

• Strike Distance: Measure the strike against the current share price.

• Implied Volatility: Review how volatility affects option pricing.

• Days To Expiration: Consider the remaining contract period.

• Assignment Tolerance: Establish how comfortable the investor is selling shares.

How To Choose A Covered Call Strike Price

The process becomes easier when the decision follows the client's actual portfolio objective.

1. Decide Whether You Would Sell The Shares

Start with the price at which selling the shares would be acceptable.

This matters because a covered call creates an obligation to sell shares at the strike if assigned. Fidelity specifically identifies willingness to sell the underlying stock as a primary consideration.

2. Compare Available Strikes

Review several contracts with the same expiration before choosing one.

Compare:

• Strike price

• Premium

• Delta

• Implied volatility

• Days to expiration

• Bid-ask spread

• Open interest and liquidity

This comparison provides a clearer view of covered call strike selection than looking at premium alone.

3. Calculate The Effective Selling Price

The effective selling price can help compare different strikes.

Effective selling price = Strike price + Premium − Applicable Transaction Costs

For example, a $110 strike with a $2 premium produces an effective selling price of $112 before applicable transaction costs.

That figure can be compared with the investor's desired selling price.

4. Evaluate Assignment Risk

Assignment becomes more relevant as the call moves further ITM.

Review the strike's relationship with the stock price and consider potential early assignment. US equity options are generally American-style, meaning they can be exercised before expiration.

5. Evaluate Lost Upside

The selected strike affects how much appreciation the investor can participate in before assignment.

Compare the premium received with the potential appreciation above the strike. This helps frame the trade-off between premium and upside participation.

How AcuBooth Applies Rules-Based Covered Call Management?

AcuBooth provides a rules-based covered call overlay for RIAs and institutional advisors.

AcuBooth operates on a designated covered-call sleeve within the client's existing custodian account. Its execution engine uses more than 12,000 deterministic rules covering areas such as screening, strike selection, roll timing, and order management.

The advisor retains discretion over the core portfolio while AcuBooth operates within the approved overlay parameters. Client assets remain with the custodian, while AcuBooth does not hold client assets.

AcuBooth Operating Controls

• Continuous Monitoring: The system operates throughout trading sessions.

• Deterministic Rules: Covered call decisions follow defined rule sets.

• 100-Share Minimum: Positions require at least 100 shares for covered call participation.

• Position-Level Share Caps: Advisors can limit the number of shares covered.

• Symbol Pause Controls: Advisors can prevent new orders on selected symbols.

• Automated Share-Sale Response: The system can close covered calls when underlying shares are sold.

• Trade-Level Records: Executions are logged with the triggering rule.

• No Asset Custody: Client assets remain at the custodian.

• No Withdrawal Privileges: AcuBooth does not hold client assets or withdrawal authority.

• Charles Schwab Integration: AcuBooth currently connects with Schwab accounts through its platform.

For more detail, see How AcuBooth Works, AcuBooth for Advisors, and AcuBooth Pricing.