The Covered Call Phase

A covered call is a strategy where you own shares of a stock and sell (write) a call option against them. By doing this, you collect an option premium in exchange for giving someone else the right to buy your shares at a predetermined strike price by a set expiration date.

Because you already own the shares, the call is "covered." You're not speculating — you're monetizing ownership.

Example:

• •If AAPL stays below $180 → you keep your shares and the premium.
• •If AAPL rises above $180 → your shares are "called away" at $180, but you still keep the $250 premium, locking in a defined profit.

This trade embodies the essence of the wheel: you're either collecting rent on your shares or selling them at a profit.

Covered calls serve two purposes simultaneously:

Income Generation:

You collect option premiums regularly — your steady paycheck for holding shares.

Risk Mitigation:

The premium reduces your cost basis, softening minor drawdowns in the stock.

It's the strategic balance between participation and protection — you don't need to guess the market's direction; you get paid regardless of it staying flat or modestly rising.

After assignment, your process looks like this:

This self-sustaining loop is why it's called the wheel. Every spoke leads to another source of income.

The strike price you choose dictates the balance between income and growth potential. Just as with puts, delta plays a key role.

A call delta of 0.25 to 0.35 is generally optimal for covered calls — it offers decent income while giving your shares room to rise.

Typical Covered Call Choices

Example:

You own 100 shares of AMD at $100. You sell a $110 call (30 DTE) for $3.00 premium (delta ~0.30).

Possible outcomes:

• •If AMD stays under $110 → You keep shares and the $300.
• •If AMD closes at $115 → You sell at $110, earn $1,000 in stock gain + $300 premium.

Your effective sell price = $113. That's a 13% return on your $100 basis in one month.

Not bad for "playing defense."

Covered call sellers typically choose 20–45 days to expiration (DTE). This range optimizes theta decay (time decay) while keeping you flexible.

Why 30–45 DTE Is the Sweet Spot:

• •Efficient time decay: You benefit most from option value melting faster in the final month.
• •Regular rotation: Allows consistent monthly income cycles.
• •Liquidity: Most volume and tightest spreads occur in near-term expirations.

If you prefer faster turnover (weekly income), you can sell 7–10 DTE calls — just be prepared to manage them more actively.

You must decide how aggressive to be with your strike selection. This depends on your market outlook and portfolio goals.

Scenarios:

• •Bullish Market: Sell further OTM (Out-of-the-Money) calls (delta 0.20–0.25). You earn less premium but allow more upside.
• •Neutral Market: Sell moderate OTM calls (delta 0.30–0.35). Balanced approach.
• •Bearish Market: Sell near-the-money or slightly ITM (In-the-Money) calls (delta 0.40–0.50) for max income and downside cushion.

Let's calculate the monthly yield of your covered call:

Example:

That's income from owning a stock you already wanted to hold.

Once you've sold your covered call, you have three potential endgame scenarios.

Scenario 1 — Stock Below Strike at Expiration

• •Call expires worthless.
• •Keep premium.
• •Sell another call → the wheel keeps turning.

Scenario 2 — Stock Near Strike at Expiration

• •Call value decays to pennies.
• •You can buy it back cheaply and resell another further-out call for a new premium.

Scenario 3 — Stock Above Strike at Expiration

• •You get assigned — your shares are sold at the strike.
• •You lock in capital gain + premium.
• •Return to Step 1: Sell cash-secured puts again.

Each path produces a positive outcome — either income or profit realization.

Rolling means closing your current short call and opening a new one — typically to extend duration, adjust strike, or collect more premium.

When to Roll

• •You want to avoid assignment but the stock is near the strike.
• •You want to lock more time value and keep shares.
• •You want to adjust the strike to align with a changing outlook.

How to Roll

• •Buy to close your current call.
• •Sell to open a new call with:

  • Later expiration (roll out), or

  • Higher strike (roll up), or

  • Both (roll up and out).

Rolling for credit is ideal — it means you're extending the trade and collecting more premium while maintaining control of your shares.

Many beginners fear having their shares "called away." But in the Wheel Strategy, this isn't a failure — it's the plan working as designed.

If your shares are called away:

• •You collected income through multiple call sales.
• •You likely sold at a profit (strike > cost basis).
• •You can now repeat the cycle — sell a cash-secured put and start again.

Assignment isn't the enemy; it's the rotation.

As with puts, implied volatility (IV) affects your premiums.

• •High IV: Larger premiums — but higher risk of big moves.
• •Low IV: Smaller premiums — safer, slower income.

Sell covered calls when IV is moderately elevated (not during major earnings announcements). This ensures you're getting fair compensation for the risk of capping upside.

Let's extend the AMD example from earlier.

Case A: AMD closes at $108

• •Call expires worthless. Keep shares and $300.
• •Sell another $110 call.

Case B: AMD closes at $115

• •Shares called away at $110.
• •You earn $1,000 (stock gain) + $300 premium = $1,300 total.
• •Return to step one — sell another put.

In both cases, you win. Either you continue earning or lock in a realized gain.

Once you're comfortable, you can experiment with variations to fine-tune risk and reward.

1. The Poor Man's Covered Call (PMCC)

A capital-efficient version using LEAPS (long-term call options) instead of owning shares outright. It replicates a covered call at lower cost — ideal for smaller accounts.

2. The Covered Strangle

Sell a covered call and a cash-secured put simultaneously on the same stock. This generates double premium but requires more capital and management.

3. The Laddered Call

Sell multiple calls at different expirations or strikes for layered income flow.

• •Selling calls too close to the current price — limits upside unnecessarily.
• •Holding through earnings without adjusting — risk of sudden spike and assignment.
• •Failing to roll early — once the stock surges through the strike, rolling becomes expensive.
• •Selling on low IV stocks — poor income potential.
• •Becoming emotionally attached to shares — remember, this is a system, not a collection.

Let's quantify the performance.

If you sell one $2 call every month on a $100 stock:

If you're assigned at a profit after several months, your total return may easily exceed 30–40% annualized — without needing to "time the market."

That's the quiet magic of the Wheel Strategy: time + consistency = compounding income.

To turn this into a system:

• •Every 30 days, review your holdings.
• •Sell calls on any shares not currently covered.
• •Close early at 50–75% profit to recycle capital.
• •Log all results — your data is your feedback loop.

Eventually, the process becomes muscle memory. You're not trading — you're managing a small, self-running income portfolio.

Let's see the full loop in action:

Each cycle yields $250–$1,250 on a $9,500 investment — 2–12% per month, depending on market behavior.

Covered calls turn passive ownership into active productivity. You become less of a speculator and more of a portfolio manager — extracting rent from your capital.

It's a reminder that in markets, motion beats prediction. You don't need to forecast where a stock will be; you just need to know how to profit from where it is.

By mastering covered calls, you've completed the second arc of the wheel. Your shares are no longer idle — they're working for you, month after month.

The next chapter will expand this mastery: how to manage, scale, and automate the wheel across multiple positions — transforming it from a simple income tactic into a full-fledged strategy for financial independence.