Brian Lee
Jul 07, 2025
This example has been deliberately simplified to illustrate the core covered call strategies I use. While I originally intended to include more detail, the added complexity would have distracted from the key concepts. I’ve chosen to reserve those advanced discussions for future articles.
At this stage, it’s more valuable to present a high-level overview of my approach to trading covered calls. Once that framework is clear, we’ll explore important details such as pricing, selecting optimal option deltas, and other strategic variables.
Warning: I strongly recommend against applying the lessons from this example literally. This article simplifies many elements to focus on the basic cycle. In reality, the strategy requires more nuance. It may appear as though you can simply repeat sell-to-open and buy-to-close orders, but this cycle must be managed with additional considerations that we’ll cover in upcoming articles.
The diagram below shows how the strategies in this article work together in a nutshell.
Sell-to-open and buy-write are the primary methods for establishing a covered call position. Once the position is active, how you manage it depends on market movement.
My preferred approach is to use buy-to-close orders to exit the position early, typically when I can capture a 30% gain on the option premium. This allows for frequent repositioning and efficient use of capital.
If the market doesn’t offer a favorable exit, I generally hold the position until expiry and let the option outcome play out. If that too becomes unfavorable—such as when the underlying moves sharply against the strike—I use rolling as a last resort to adjust the position and maintain control.
I chose to keep the graphs in this article simple by showing the closing price for each day of the week. Stock prices change continuously, so these charts present an oversimplified view of the market.
However, the core principles remain the same—whether you’re analyzing price movements over 5-minute intervals or from one day to the next.
To use covered call strategies effectively in changing markets, you must understand how the underlying stock, option delta, and option price are connected.
Covered calls are easy to grasp because the relationship is straightforward: when the underlying stock price rises, delta increases, which in turn raises the option price. When the stock price falls, delta and option price both decrease.
Keep in mind, this relationship focuses on delta and does not account for other option Greeks. However, for weekly covered calls, the influence of other Greeks is minimal and can typically be ignored.
Understanding this core relationship will give you a strong foundation for mastering all covered call strategies.
In summary:
⬆️ Underlying Price ⬆️ Option Delta ⬆️ Option Price
⬇️ Underlying Price ⬇️ Option Delta ⬇️ Option Price
In the U.S. stock market, call options are rarely exercised before expiration. Covered calls are typically assigned only after the market closes on Friday.
Early assignment can happen if the option is in-the-money (the underlying price is above the strike), but this is uncommon. Still, it’s important to understand the risk so you’re not caught off guard.
This becomes especially important during a prolonged market downturn, when you may end up selling covered calls with strike prices below your cost basis in the underlying stock. If these calls are assigned early, you could be forced to sell shares at a loss instead of continuing to hold the position in hopes of recovery.
Personally, I’ve never had early covered call assignments. Put options, on the other hand, will be aggressively exercised for profit. For this reason, I don’t trade put options.
In this article, we’ll walk through all the key strategies I use: hold until expiry, sell-to-open, buy-to-close, and roll. For simplicity, let’s assume you don’t currently own any shares. If you do, the main concept to understand is sell-to-open, which I’ll explain later.
We’ll use a fictitious company called ABC to keep the numbers simple. The option chain used in this example is intentionally unrealistic but helps illustrate the strategies clearly.
Based on expected daily volatility, ABC is likely to trade between $96.22 and $103.78. When choosing a strike price, we prefer one above the current underlying price that still offers a reasonable chance of assignment. In this case, a delta of 0.3 (a 30% probability of assignment) offers a balanced setup— it lets us collect a $100 option premium while retaining the potential to earn an additional $300 if the shares are called away at the $103 strike. (One covered call controls 100 shares.)
To initiate the position, we use a buy-write order, which simultaneously buys 100 shares of the stock and sells 1 call option. Both stocks and options are quoted with bid and ask prices, and the midpoint between them—the mid price—is typically the best target for execution. Since buy-write orders are time-sensitive, using the mid price increases the likelihood of a timely fill.
In our example:
We place a buy-write order with a net limit price of $99 and a Day order expiry. This enters 1 covered call position (100 shares + 1 short call), with a total capital outlay of $9,900.
From this point forward, we’re free to manage the position using buy-to-close, sell-to-open, or roll strategies. Before exploring those, it’s helpful to walk through the hold-until-expiry approach to understand how to re-enter a new position after a covered call expires.
We covered this strategy in Scenario 2: A Basic Covered Call Strategy. But let’s go over it again using the example.
In this example, we bought the underlying at $100 and sold a covered call with a strike price of $103. We ignore whether the option is in-the-money (ITM) during the week—such as on Tuesday—and wait until Friday to see if it finishes ITM. If so, we expect the shares to be called away and keep the premium as additional profit.
If the option expires in-the-money (ITM), the shares will be called away at the $103 strike price. This results in a $300 gain from the underlying and allows us to keep the $100 option premium, for a total profit of $400.
It is also possible that the option finishes out-of-the-money (OTM) on Friday.
In this case, the option expires worthless, and we keep both the underlying and the premium; our profit is $100. This gives us the opportunity to sell a new covered call using a sell-to-open order the following week.
Let’s assume the previous covered call expired out-of-the-money (OTM), so we still hold 100 shares of ABC. In this case, we can initiate a new covered call by placing a sell-to-open order.
A sell-to-open order is used to open a short position in an option. In the context of covered calls, this means writing (selling) a call option against shares you already own. You collect the option premium upfront in exchange for agreeing to sell your shares at the strike price if the option is exercised.
For this example, the same call option is available with a new expiration date of July 18. We place a sell-to-open order at the mid price of $1 with Day expiration, collecting $100 in premium.
But we don’t have to wait until Friday to realize that profit. In the next section, you’ll see how to use buy-to-close orders to exit early and lock in gains.
To use this strategy effectively, it’s important to understand how option prices respond to changes in the underlying stock. When the stock price declines, the option price often drops as well. This creates an opportunity to buy back the option at a lower price—locking in a profit before expiration.
Although you won’t keep the full $100 premium, buying to close at a lower price still captures a portion of that premium. More importantly, it frees you to immediately sell another call, potentially generating additional income before the original option would have expired.
The week of July 14 may look like this.
When the market is trending downward, option prices generally fall along with the underlying stock. This presents a good opportunity to use a buy-to-close order to exit the covered call at a profit.
A realistic profit target is 30% of the option premium. While a 50% gain may be possible, it usually requires a significant market move and may take longer to materialize. In most cases, capturing 30% is achievable within a day or two and allows you to redeploy capital more efficiently by opening a new position.
Therefore, we place a buy-to-close order with a limit price of $0.70 and mark it as GTC (Good ’Til Canceled). This allows the order to remain open until it is filled, giving the market time to reach the target price and lock in a 30% profit on the original $1.00 premium.
Now that you’ve seen how the sell-to-open and buy-to-close cycle works, you can repeat it as often as market conditions allow. I often trade the same option multiple times throughout the week—selling and closing it for a profit each time.
That said, this process is not as simple as it sounds. Timing and market conditions matter, and I’ll go over the details in the next article.
Each cycle is a chance to earn income while keeping risk under control.
It’s possible that the underlying price rises significantly above the strike price during the week of July 14. When this happens, you have two options: hold the position through expiration or roll the covered call to adjust your trade and realize the loss on the original option.
Rolling involves closing the current covered call and opening a new one, typically with a different strike price, expiration date, or both. This allows you to adapt the position based on market conditions.
While I use sell-to-open and buy-to-close strategies more frequently, rolling can be valuable when the market moves sharply against you.
Let’s assume ABC gains strong momentum during the week of July 14.
By midweek, the option may be trading around $7—don’t worry about the mechanics for now; we’ll cover that in future articles. This would give you a net loss of $600 on the original option. That’s not necessarily a problem if you manage the roll carefully.
When rolling at a loss, you need to offset that loss by increasing the time value and strike price of the new option. For example, a suitable replacement might be an option expiring later with a $110 strike and a lower delta.
I include rolling here for completeness, but it deserves a more detailed discussion. For now, I recommend focusing on mastering the sell-to-open and buy-to-close cycle. Once that foundation is in place, we’ll move on to more advanced topics like how options are priced with more nuanced discussions.
I’m glad you’re taking the time to read this. While I aim to present the information clearly, these articles should still be considered drafts. I don’t expect to refine the structure or flow meaningfully until the full series is written, feedback is gathered, and there’s a clear understanding of what makes the series truly valuable.
As mentioned earlier, this isn’t meant to be a simple checklist of steps— although we’re getting closer to discussing specific parameters of the strategy. In many ways, the core mechanics align with general covered call strategies. But the value lies in how all the trades are coordinated: how we implement tax loss harvesting, how we apply 30-day historical volatility, and how we manage positions systematically over time.
There’s also potential for building software around this strategy to improve execution and tracking.
Thanks for being part of this journey. I hope it helps you move closer to financial independence.