The Covered Call is Phase 3 of the options wheel strategy. After being assigned shares from a cash-secured put, you sell a call option against those 100 shares. You receive an upfront premium in exchange for agreeing to sell your shares at the chosen strike price if the stock rises above it by expiration.
It is called "covered" because you already own the underlying shares, meaning you have no theoretical infinite risk compared to selling a "naked" call.
Strike Selection for CCs: You must never sell a covered call at a strike below your Adjusted Cost Basis. Doing so guarantees a net loss on the position. Most wheel traders sell CCs at a strike at or slightly above their ACB, aiming for a delta between 0.20 and 0.40.
The Dilemma: Selling a CC caps your upside. If the stock surges dramatically above your strike, you are "capped out" and miss the extra gains. This is the core trade-off of the wheel strategy.
Examples of Covered Call (CC) in Action
- 1Owning 100 shares of MSFT at a $400 ACB, and selling a $410 strike call expiring in two weeks for $200.
- 2Selling a covered call at the $105 strike for $1.50 ($150 total) when ACB is $103 and stock is at $102.
- 3Selling a $0.30 delta CC on SPY at the $560 strike expiring in 14 DTE while holding shares at a $545 ACB.