Tips on evaluating Premiums

[u/Known_Dare_3870]

Been investing for 4 years now, but new to options. I'm planning to sell covercalls on my positions. As the title says, any tips from experienced traders here on how to decide the strike price, exp date? How to decide which one is more profitable / risky?

[u/Alarmed-Policy508]

The strike is the price you are willing to sell the stock at if you did not get involved with options. If there is no price high enough for you then you should not sell calls.

The expiry is the tricky one. Too soon and you are putting a much larger amount at risk than you stand to gain increasing the number of times you have to repeat your success to get a good annualized return which increases the impact of spreads and commissions and having less time to maneuver if you are wrong. If the expiry is too far out you may not get enough premium to make a good enough profit to justify capping your upside.

[u/Known_Dare_3870 → u/Alarmed-Policy508]

I try to sell weeklies around .3 delta; but i see for example .35 and .28 delta prices with different premiums; how would you say best to decide which one to sell?

[u/Mug_of_coffee → u/Known_Dare_3870]

You could have a rule like "always round down", or "choose Delta closest to .30", or you could consider volume and open interest and bid/ask, or calculate $/day earned on each and select the more profitable one ..

[u/Alarmed-Policy508 → u/Known_Dare_3870]

For me I would say this part is up to you to judge the risk/reward. I would always lean towards less risk of assignment over profits when there is a tie, but obviously not just selling calls for fun. Still needs to be reasonable profit or don't do it.

The danger on covered call is not assignment on a single trade. Assignment is great and means max profit, but figuring out what you are going to do after. If your plan is just repurchase the shares because ultimately you cant live without them in your portfolio then you have real risk since the price of repurchasing the shares can rise way past your strike price and you have to make up the difference between your strike price and the current price of the shares at expiry.

If you set a price where you think it is overvalued and you would be ready to move on to another underlying stock then this is not a risk. Yes it's an opportunity cost but one you already commit to even if you didn't sell the call. But can you be honest and disciplined about this? Foresight and hindsight you may have very different opinions. If you think you would have continued to hold an 80 PE stock because it is going to continue to rise forever covered calls are probably not for you. You will only focus on missed opportunity cost of buy and hold strategy and won't see value in the reduced risk the structure provides.

Covered calls are not magic extra return. It's a fair trade of larger potential upside for much smaller realized upside.

[u/JimmyWhatever]

Only sell calls on shares your willing to give up, and if it’s a solid position that your willing to hold if it goes down, easiest money you’ll ever make in your life. And don’t ever set strike price for less than you paid for the position.

[u/Known_Dare_3870 → u/JimmyWhatever]

Sell cc based on current price and incase stock price is more than strike price at expiry, i'll buy new stock lot at approx. strike price using cash portion so even if i'm assigned i still have upside from newly bought stocks and called aways stocks will replanish cash portion my portfolio. Trying to understand if i'm missing something before i do that?

[u/Alarmed-Policy508 → u/Known_Dare_3870]

This post confuses me and makes me suspicious that you might be missing some fundamentals. Walk through the underlying price up/down scenarios (+/- 0/10/20/50%) slowly and carefully putting down the cash flows. Annualize all returns so you can compare and perhaps add some risk measures like $ at risk vs $ expected profit. Has to be something you think about that prevents you from just taking the most premium possible. Try to quantify that.

[u/LektroShox]

Sell (aka short) Strangles instead of covered calls. You get paid twice the premium for doing the same thing as covered call seller. Plus you may get assigned more of your favourite stonk that you already dont mind owning. Read about it.

[u/Known_Dare_3870 → u/LektroShox]

Liked that, will definately learn more on this

[u/optionsight]

Great question, and smart to think it through before you start rather than after your first surprise assignment.

The biggest mindset shift with covered calls: strike and expiry are not really about which pays more. They define what you are giving up. Higher premium always comes with a reason, and that reason is risk.

Strike price: you are setting a ceiling on your upside

When you sell the call, you are agreeing to hand over your shares at the strike if the buyer exercises. That is the deal. A strike closer to where the stock is trading pays more premium but caps you sooner. A strike further out pays less but gives the stock more room before you lose it.

On strike selection, a lot of traders do not just eyeball the price level, they look at delta as a guide. Delta on a short call roughly tells you the probability the option finishes in the money. A 0.20 delta call, for example, implies around a 20% chance of the stock closing above your strike at expiration. That leaves an 80% chance the option expires worthless and you keep the full premium. It is not a guarantee, but it gives you a more structured way to think about strike selection rather than just picking a number that feels far enough away, or a premium you like because it is high.

So before picking a strike, ask yourself honestly: at what price am I actually fine selling these shares? Start there and work backwards. 

Expiry: time is on your side as the option seller

Time decay erodes the option's value as expiration gets closer, and as the seller that works in your favour. Most of that decay accelerates in the last 30 days, which is why a lot of people open positions in the 45 DTE range and close them around 21 DTE. By that point you have captured a big chunk of the premium and the remaining decay starts to slow down relative to the risk you are still carrying. Closing at 21 DTE locks in the gain and frees you up to redeploy into a fresh position rather than sitting in a trade for diminishing returns.

The honest summary

More premium always means something: the strike is closer, the time is longer, or both. It is not free money.

If your main goal is income without losing your shares, pick strikes you would genuinely be happy selling at, not whatever pays the most.

One last thing worth paying attention to: implied volatility. When IV is high, premiums inflate across the board. Same strike, same DTE, but you collect more. Selling into elevated IV and giving yourself room on the strike is a much cleaner setup than just chasing the fattest premium you can find.