How to Sell Your First Covered Call (A Complete Step-by-Step)

Theory becomes practice in this article.

Everything covered in the first 21 articles of this series is about to be applied to a single, concrete trade. The example used throughout is a hypothetical but realistic setup: an investor owns 100 shares of a stock trading at $87.50 and wants to sell a covered call against those shares to collect premium income.

Work through each step in sequence. This is the exact process you will follow on your first trade and on every covered call you place afterward.

Step 1: Confirm You Own at Least 100 Shares

A covered call requires owning at least 100 shares of the underlying stock. One options contract covers exactly 100 shares. If you own 200 shares, you can sell up to two covered call contracts. If you own 150 shares, you can sell one contract and the remaining 50 shares are uncovered.

In our example: 100 shares of the stock at $87.50. One covered call contract is available.

This check also includes confirming your brokerage account is approved for options trading at the appropriate level. Most brokerages offer options trading at multiple approval tiers. Selling covered calls, also called a buy-write in some platforms, typically requires Level 1 or Level 2 options approval, depending on the broker. If you are not yet approved, the approval process involves a short application and is usually processed within a day or two.

Step 2: Check Implied Volatility Rank

Before opening the options chain, check the implied volatility rank of the underlying stock.

IVR above 50 signals that current implied volatility is in the upper half of its 52-week range and premiums are above average. This is the preferred environment for selling a covered call. The premium available at any given strike is richer than it would be in a low-IV environment.

IVR below 30 signals compressed premiums. The income available may not adequately compensate for the commitment made. Consider waiting for a higher IVR environment before entering.

In our example: the IVR is 58. Above 50. Conditions are favorable. Proceed.

Step 3: Open the Options Chain and Select an Expiration

Open the options chain for your stock in your brokerage platform. At the top of the chain, you will see available expiration dates. Select an expiration in the 30 to 45 day range.

In our example: today is mid-month. The next monthly expiration is 38 days away. Select it.

If the stock has weekly expirations available, you will see many more dates. Stick with the monthly expiration for your first covered call. Monthly expirations are the most liquid for most stocks and provide the optimal theta decay profile

Step 4: Select Your Strike Using Delta

With the options chain open at your chosen expiration, navigate to the calls side. Find the column labeled delta. The current stock price of $87.50 sits approximately at the at-the-money row, which will have a delta near 0.50.

Move down the chain to strikes above the current stock price. As strikes increase, deltas decrease. You are looking for a call strike with a delta in the 0.20 to 0.35 range.

In our example, scanning down the chain:

The $90 call has a delta of 0.31. The bid is $1.35, the ask is $1.55, and the midpoint is $1.45. The spread is $0.20, which is acceptable for this underlying. Open interest is 847 contracts. The IVR has already been confirmed at 58.

This is the target strike. A delta of 0.31 implies approximately a 69 percent probability of the option expiring worthless. The midpoint of $1.45 represents $145 of income per contract if filled at the midpoint. And $90 is a price at which you are comfortable selling your shares.

That last point is not a technicality. Ask it directly. If your shares were called away at $90, would that be an acceptable outcome? If the answer is yes, proceed. If the answer is no, move the strike higher.

Step 5: Place the Order

Open the order entry screen in your brokerage platform. Select the following:

Action: Sell to Open Symbol: The ticker of your stock Expiration: The date selected in Step 3 Strike: The strike selected in Step 4 (in our example: $90) Contract type: Call Quantity: 1 contract (for 100 shares owned) Order type: Limit Limit price: The midpoint of the bid-ask spread (in our example: $1.45) Time in force: Day (try the midpoint first; if unfilled after a few minutes, adjust slightly)

Never use a market order on options. Place a limit order at the midpoint first. If the order does not fill within a few minutes, you may move the limit price down by $0.05 at a time, giving up a small amount of the midpoint to get a fill. For an option with a $0.20 spread, moving $0.05 below the midpoint to $1.40 is still a reasonable fill.

Once filled, confirm the premium has been received in your account. In our example: $145 credited to the account immediately.

Step 6: Monitor and Manage

With the covered call in place, two management checkpoints apply.

50 percent profit target: Monitor the position periodically. When the short call can be bought back for $0.73 or less (50 percent of the $1.45 collected), close the position by buying the call back. Place a buy-to-close limit order at $0.73 or a good-till-cancelled order if your platform supports it. At that point, the most efficient theta income has been captured and it is time to consider the next entry.

21-day checkpoint: If the position has not reached 50 percent profit by the time 21 days remain until expiration, decide: close the position outright, roll it forward to the next monthly expiration for a net credit, or allow it to expire if the stock remains well below the strike with a high probability of worthless expiration.

Frequently Asked Questions

What brokerage account level do I need to sell covered calls? Most brokerages require Level 1 or Level 2 options approval to sell covered calls. The exact level varies by broker, but covered calls are considered one of the least complex and lowest-risk options strategies and are approved for most individual investors who apply. The application typically asks about your investment experience, financial situation, and familiarity with options. If you are reading this series from the beginning, you have built more foundational knowledge than most applicants. The approval process usually takes one to two business days.

What if my covered call goes deep in the money before expiration? If the stock rallies significantly above your strike price before expiration, the covered call is deep in the money and delta is rising toward 1.00. The option is now worth more than you collected, meaning buying it back to close the position would result in a net loss on the option itself. However, this is offset by the appreciation in the shares. The practical decision is whether to let the position run toward expiration, accept assignment and sell the shares at the strike, or buy back the call for a loss and sell a higher strike to give the shares more room. This situation is covered in detail in the rolling article later in this series.

How often can I sell covered calls on the same shares? As often as conditions are favorable. Once a covered call expires worthless or is closed at the 50 percent profit target, the shares are free and a new call can be sold immediately. Many investors who run covered calls systematically cycle through monthly expirations, selling a new call at the next monthly expiration as soon as the previous position is closed. The frequency is determined by the IVR environment at each potential entry, not by a fixed calendar. If IVR is low when the previous position closes, waiting a week or two for improved conditions is a legitimate and often profitable discipline.

Probabilities over predictions,

Andy

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This newsletter is for educational purposes only and should not be considered investment advice. Options trading involves significant risk and is not suitable for all investors. Past performance does not guarantee future results. Always consult with a qualified financial professional before making investment decisions.