How To Choose Covered Call Strike Price (That WON’T Get Assigned)

Do you have a Covered Call that is In-The-Money (ITM) and now you regret selling the Covered Call?

Furthermore, you’re now worried that your stock is going to get called away because you want to keep the shares.

So you tell yourself that you will never sell a Covered Call again.

If the above sound familiar, then you’re not alone.

In fact, many people like yourself have faced this predicament.

I too have gotten into such a situation many times before.

So what’s the solution?

Well, you could either stop selling Covered Calls, which is a viable solution…

Or, you could sell Covered Calls that WON’T get assigned.

How do you do that?

The answer is by selecting Covered Call strike prices that have very little chance of getting In-The-Money at expiration.

And there are a few methods of doing so.

Method #1: Choose Covered Call Strike Price With Low Deltas

If you’re unfamiliar with what delta is, it is one of the Option Greeks.

By definition, it measures the rate of change in an Option’s theoretical value per dollar move in the underlying security.

That means if the delta of an Option is 0.50, it means that for every dollar move up, the value of the Option will increase by $0.50.

And for every dollar move down, the value of the Option will decrease by $0.50.

Delta is also used as a gauge in terms of the percentage chance the Option will be ITM at expiration.

Above is the screenshot of the Option Chain and chart of IBM.

The left-hand side shows two columns labeled “Prob.ITM” and “Delta” (in the green box).

“Prob.ITM” stands for Probability of being ITM.

It shows the percentage chance that the Option will be ITM at expiration.

If you noticed, the percentages closely match the delta of the Option.

For example, take a look at the 132 strike price at the top of the Option Chain.

The “Prob.ITM” shows a “62.43%” and the delta shows a “.66”.

That’s pretty close.

That means we can use the delta as a gauge of the percentage chance the Option will be ITM at expiration.

So a Covered Call with a delta of 0.66 means it has about a 66 percent chance it will be ITM at expiration.

And a Covered Call with a delta of 0.10 means it has about a 10 percent chance it will be ITM at expiration.

Therefore if your broker software does not have the “Prob.ITM” column, you can simply refer to the delta.

How to Use Delta to Choose A Covered Call Strike Price

Now, if you take a look at the IBM chart (same image above), you can see that IBM is currently trading at $137.62.

So how do we choose the strike price for the Covered Call?

Let’s say you want to choose a Covered Call with about a 15 percent chance of being ITM at expiration, then you would look for the strike prices that are around 0.15 delta.

That means that you would choose either the 150 or 155 strike price.

For the 150 strike price, you would be getting about $0.98 in credit (which is $98 per contract).

For the 155 strike price, you would be getting about $0.43 in credit (which is $43 per contract).

Now, the main reason why many people get into trouble with their Covered Calls is that they choose strike prices based on how much they can get.

For example, if you chose the 144 strike price you’d be able to get a credit of $2.42 (which is $242 per contract).

That’s more than double what you’d get with the 150 or 155 strike price.

But the problem is that the 144 strike price is very close to where IBM is currently trading.

It has a delta of 0.31, which means there’s about a 31 percent chance it will be ITM at expiration.

With the 155 strike price, although you will be receiving $1.99 lesser in credit ($2.42 minus $0.43)…

If IBM is above 155 at expiration, you will make an extra $11 in capital gains.

It doesn’t make much sense to make an extra $1.99 in credit and forego $11 in capital gains!

So if you want to choose Covered Call strike prices that have a low chance of getting assigned, then you want to choose the strike prices that have low deltas.

And that means strike prices with 10 – 15 deltas.

With these strike prices, your Covered Call would only have a 10 to 15 percent chance of getting assigned.

And you would still have a decent premium to collect.

Method #2: Choose Strike Prices Above A Resistance Level

The term “resistance level” means price levels on the chart where the stock has trouble going above.

That’s because there is more selling at those levels than there is buying.

So identifying these resistance levels will help you choose better strike prices to sell your Covered Calls at.

Take a look at the chart above.

Are you able to identify the resistance levels in the chart above?

If you’ve managed to identify the 3 resistance levels, as shown above, good job!

These are areas on the chart that the market has trouble trying to break above.

At the bottom right of the chart, it shows that QQQ (Nasdaq ETF) is trading at $286.96.

If you were to sell a Covered Call, what strike price would you choose to sell at?

Most likely a strike price that’s above the resistance level at $315, right?

That’s because from the chart we can see that there’s quite a bit of selling pressure at that level.

So if QQQ were to get up there again, chances are that it would have some trouble breaking above it.

So choosing a Covered Call strike price above $315 would be logical and smart.

But what if you looked at the Option Chain and saw that the strike prices above $315 aren’t giving much premium and the delta is below 0.10?

Then there’s no need to sell a Covered Call now!

We just have to wait till QQQ goes a little higher before selling the Covered Call.

Okay, here’s another chart to see how well you can identify resistance levels.

Can you identify the resistance levels?

There are 2 resistance levels.

Did you spot it correctly?

If so, good job!

So if you were to sell Covered Calls on this stock, which strike prices would you choose?

Above the strike prices of either $172.50 or $177.50!

By identifying where the resistance levels are on the chart, you’d be able to choose the strike prices that have a lesser chance of getting ITM at expiration.

Method #3: Sell Covered Calls When Stock Is Overbought

When a stock is “Overbought”, it means that the stock has already moved up quite a bit.

And there’s a higher chance that it will come back down than it will continue going up.

On the other hand, when a stock is “Oversold”, it means the stock has already gone down quite a bit.

And there’s a higher chance it will go back up than it will continue going down.

So when selling Covered Calls, would it make more sense to do so when the stock is Overbought or Oversold?

Obviously, it makes more sense to sell Covered Calls when the stock is Overbought!

So how do we tell if a stock is Overbought or Oversold?

That’s by using indicators.

There are several indicators that measure if the stock is Overbought or Oversold.

The one I like to use is the Stochastic Oscillator.

The chart above is of the SPY (S&P 500 ETF) and the Stochastic Oscillator is at the bottom.

The market is considered Overbought when the light blue line crosses above the top yellow line.

And the market is considered Oversold when the light blue line crosses below the bottom yellow line.

If you noticed, every time the Stochastic Oscillator indicates that the market is Overbought, the market goes down.

So the Stochastic Oscillator is pretty accurate to identify turning points in the market.

But of course, it doesn’t work 100 percent of the time.

In a downtrend, when the market is making lower highs and lower lows wave patterns, the Stochastic Oscillator tends to be more accurate in identifying Overbought conditions.

In an uptrend, when the market is making higher highs and lower highs wave patterns, the Stochastic Oscillator tends to be more accurate in identifying Oversold conditions.

So if you want to sell Covered Calls that have a lesser chance of getting assigned…

Then only sell Covered Calls when the Stochastic Oscillator shows an Overbought reading.

Method #4: Avoid Selling Covered Calls Into Earnings

When a stock has an earnings announcement, it can make a very big move.

In the chart above, you can see that when IBM released its earnings, it made huge moves both times.

It even gapped up on the second earnings announcement.

If you had sold Covered Call prior to the earnings announcement, the price could have gapped above your Covered Call strike price.

Of course, if the stock gapped down, it would have benefitted your Covered Call.

But the risk is not worth it.

That’s because if it gaps down, you only make that little credit that you received.

But your overall stock position could be down.

And if it gaps up, you have limited the upside gains that your stock could have made.

Above is the chart of CRM (Salesforce), and after it released its earnings, it gapped up as well.

Now, while earnings can give a juicer premium because of the increased volatility, you would risk getting your stock called away if there is a huge up move.

A better alternative would be to wait until the stock has released its earnings and made its move.

And if there’s a huge gap up, you can then sell a Covered Call.

That’s because a lot of the time, the stock will go back down to “fill the gap”.

That’s what happened in the CRM chart above.

After the gap up, CRM subsequently came back down to fill the gap.

So if you want to avoid getting assigned on your Covered Calls, then you want to avoid selling Covered Calls into earnings.

Method #5: Roll Covered Call When Delta is 0.50

What if you’ve done all the four methods I mentioned above and your Covered Call is still in ITM?

Then you want to have a preventive measure in place.

And that is to roll your Covered Call when the delta reaches 0.50.

That is when the stock has reached the strike price of your Covered Call.

So for example, let’s say you have a Covered Call at the strike price of 150.

If the stock price goes up to $150, that’s when you roll your Covered Call.

And the roll that you want to do is to Roll Out & Up.

That means to roll to a further expiration date and to a higher strike price.

So for example, rolling from 15 Oct 21 to 19 Nov 21, and from the strike price of 150 to 155.

You’d also be able to get a credit for doing this roll each time.

So whenever the stock climbs up to your Covered Call strike price, you Roll Out & Up.

And you can keep doing this over and over again until you reach the furthest expiration date that is available.

The downside is that each time you roll, you will be extending the time of your Covered Call.

That means it can take a long time to realize the profits on your Covered Call.

But the benefit is that you will not get your stock called away, which is your objective in the first place or you wouldn’t be reading this article!

So if you want to avoid getting your Covered Calls assigned, then roll your Covered Calls whenever it reaches a delta of 0.50.

Putting It All Together

To have the least chance of having your Covered Call be ITM at expiration and having your stock called away, use these 5 methods:

• Method #1: Only sell Covered Calls with low deltas.
• Method #2: Choose the strike price that is above a resistance level.
• Method #3: Sell Covered Calls only when the stock is Overbought.
• Method #4: Avoid earnings announcement
• Method #5: Roll your Covered Call whenever it’s at delta 0.50.

While each method individually can help you choose a strike price that has a low chance of getting assigned…

It would be even more powerful if you combine all the 5 methods and only sell your Covered Call when it meets each of the criteria.

Now that you know the secret to choosing Covered Call strike prices, it’s time for you to take action and put this knowledge into use!