Strategies

Covered Call (OTM)

A classic income structure for an existing stock position: hold the shares and sell a call above spot to collect recurring option premium.

Description

When an OTM covered call makes sense

In a classic covered call you already own 100 shares per contract and sell a call with a strike above the current stock price. That brings in immediate premium while leaving more upside open than the ITM variation.

The setup fits best with a sideways to moderately bullish view. The premium lowers cost basis, but it only provides limited downside protection. In return, gains are capped above the strike because the stock can be called away.

Strike selection is the core trade-off. Too close to spot and upside disappears too quickly. Too far out of the money and premium becomes too small. In practice, slightly to moderately OTM calls with short to medium duration tend to offer the most balanced setup.

Example: classic covered call on Coca-Cola

Assume KO trades at 64.00 USD and your share basis is 62.00 USD. You sell a 68 call with roughly 45 DTE for 0.85 USD.

  • Premium You collect 0.85 USD per share or 85 USD per contract.
  • New basis 62.00 minus 0.85 = 61.15 USD.
  • If KO stays below 68 The option expires worthless and you keep both shares and premium.
  • If KO rallies above 68 The shares can be called away at 68 USD.
  • Maximum profit 68.00 minus 62.00 plus 0.85 = 6.85 USD per share or 685 USD per 100 shares.
  • Trade-off Any move above 68 USD no longer belongs to you.

Poor man's covered call as an alternative

The poor man's covered call replaces 100 shares with a deep ITM long-dated call. Against that long call you then sell a shorter-dated OTM call. The goal is to replicate similar income logic with much less capital.

For that structure to work well, the long call should have high delta and low remaining extrinsic value. Otherwise too much capital is tied up in time value that still has to be earned back.

  • Example AAPL trades at 210 USD.
  • Long call Buy a Jan-2027 140 call for 71.50 USD.
  • Structure That consists of 70.00 USD intrinsic value and 1.50 USD extrinsic value.
  • Short call Sell a 225 call with 45 DTE for 2.20 USD.
  • Capital About 7,150 USD instead of roughly 21,000 USD for 100 shares.
  • Heuristic The setup becomes attractive when short premium can amortize the remaining extrinsic value of the long call relatively quickly.
  • Risk Strong rallies or early exercise of the short call require active management or rolling.

Sources: DeltaValue, LYNX, CapTrader, tastylive.