Selling covered calls is how you turn idle stock holdings into a continuous income stream. But most guides skip the timing question: when should you actually sell?
That's where Days to Expiry changes the game. By matching your expiration choice to market conditions, you can maximize income while keeping control of your shares.
Here's the framework.
What Is a Covered Call?
A covered call is simple: you own shares, and you sell the right for someone else to buy them at a higher price by a future date. In exchange, you keep the premium they paid.
Example:
- You own 100 shares of Apple at $240
- You sell 1 covered call with a $250 strike expiring in 21 days
- You collect $200 in premium today
- If Apple stays below $250, your shares don't get called away, and you keep the stock + premium
- If Apple rises above $250, your shares get called away at $250 (profit locked)
Income you generate: $200 per share, or $200 total (per 100 shares)
Annualized yield: ($200 premium / $24,000 stock value) × 17 cycles per year ≈ 14% annual income
That's the covered call in a nutshell. The real advantage? It works in sideways or slightly up markets. You don't need explosive growth to profit.
Three DTE Strategies: Which One?
The biggest mistake covered call sellers make is treating all expirations the same. They're not.
Your expiration choice changes your income, risk, and time commitment. Here's how to think about each:
Strategy 1: Weekly Covered Calls (0-7 DTE)
Best for: Stable blue chips, high portfolio turnover, active management
Income generation:
- Sell calls expiring in 3-5 days
- Premium is smaller per cycle (~0.5-1% of stock price)
- But you repeat 50+ times per year
- Annual yield: 25-35% (if you're disciplined about rolling)
Real example (Apple at $240):
- Sell 5 DTE call at $245 strike = $40-60 premium
- Hold for 3-4 days, let it expire worthless
- Repeat next week
Why it works: Theta decay is your friend. With only 5 days left, options lose value fast—whether stock price moves or not. You capture that decay repeatedly.
Time commitment: ~10-15 minutes per week per position
Best brokers: Interactive Brokers, Tastytrade (fastest execution, lowest commissions)
Strategy 2: Monthly Covered Calls (21-45 DTE)
Best for: Most investors. The balanced approach.
Income generation:
- Sell calls expiring in 30-35 days
- Premium is larger per cycle (~1.5-3% of stock price)
- You sell once per month
- Annual yield: 18-24% (more realistic than weekly for most traders)
Real example (Apple at $240):
- Sell 30 DTE call at $245 strike = $150-250 premium
- Hold for 25-30 days
- Roll or let expire
- Repeat next month
Why it works: Monthly matches your natural portfolio review cycle. You check positions once a month anyway. This fits naturally into your rhythm.
Time commitment: ~5-10 minutes per month per position
Best brokers: Fidelity, Schwab, Interactive Brokers
Strategy 3: Extended Covered Calls (45-60 DTE)
Best for: Income maximization, infrequent traders, tax optimization
Income generation:
- Sell calls expiring in 45-60 days
- Premium is highest per cycle (~2.5-4% of stock price)
- You sell once every 6-8 weeks
- Annual yield: 15-20% (but larger premiums mean fewer trades)
Real example (Apple at $240):
- Sell 45 DTE call at $245 strike = $300-400 premium
- Hold for 40-45 days
- Let expire or roll
- Repeat in 6 weeks
Why it works: You capture the entire monthly decline in option value. By the time 45 DTE passes, the option has lost 60-70% of its premium value. That's money in your account.
Time commitment: ~5 minutes every 6 weeks
Best brokers: Any broker (execution speed matters less with longer timeframes)
Which Strategy Is Right for You?
Use this decision matrix:
| Factor | Weekly | Monthly | Extended |
|---|---|---|---|
| Time available | 10+ hrs/wk | 1-2 hrs/mo | 30 min/mo |
| Number of positions | 3-5 | 5-15 | 10-20 |
| Market preference | Sideways/choppy | Sideways/up | Flat/up |
| Stress tolerance | High (frequent adjustments) | Medium | Low (set it, forget it) |
| Capital size | $25K-$100K | $50K-$250K | $100K+ |
| Experience level | Intermediate+ | Beginner-intermediate | Beginner |
| Income goal | Aggressive (25-35%) | Balanced (18-24%) | Conservative (15-20%) |
Real talk: Most people do best with monthly. It's the Goldilocks of covered calls—enough premium to matter, enough time between trades to stay sane.
Step 1: Choose Your Stocks
Not every stock is good for covered calls. You want stocks that:
1. You don't mind owning long-term (or don't mind selling)
- Selling covered calls means accepting the risk of assignment
- If Apple gets called away at $250, you're fine
- If you'd be devastated to lose the position, don't sell calls
2. Have liquid options
- The most popular 500 US stocks have liquid options
- Less popular stocks have wider bid-ask spreads (you lose money on entry/exit)
- Rule of thumb: if 10M+ shares trade daily, options are liquid enough
3. Pay dividends or have stable volatility
- Dividend-paying stocks are ideal (you get dividend + premium income)
- High-volatility stocks = higher premiums
- But also higher assignment risk
4. Avoid earnings season
- Sell calls that expire before earnings, not after
- Earnings volatility can force early assignment
- Example: If earnings are Dec 20, don't sell calls expiring Dec 22
Best covered call stocks right now:
- Stable dividend payers: JPMorgan, Coca-Cola, Procter & Gamble, Utilities (XLU)
- High volatility: Tech names (Apple, Microsoft, Tesla)
- ETFs: SPY, QQQ, IWM (highly liquid)
Step 2: Pick Your Strike Price
This is where most people get stuck. Here's the reality: there's no "perfect" strike. But there's a framework.
The Strike Selection Ladder
Aggressive (Target 10-15% annualized upside):
- Strike = current stock price + 2-3% above current price
- Higher premium
- Higher assignment probability (60-70%)
- Use when: You're comfortable selling the stock
Balanced (Target 3-5% annualized upside):
- Strike = current stock price + 5-7% above current price
- Medium premium (what most guides recommend)
- Medium assignment probability (30-40%)
- Use when: You want some upside capture + income
Conservative (Target 1-3% annualized upside):
- Strike = current stock price + 8-12% above current price
- Smaller premium
- Low assignment probability (10-20%)
- Use when: You want to keep the stock and just earn income
Real examples (Apple at $240):
- Aggressive CC: Sell $245 strike (collect $100-200 premium)
- Balanced CC: Sell $250 strike (collect $50-100 premium)
- Conservative CC: Sell $255 strike (collect $20-40 premium)
Pro tip: Use 5% as your baseline. If the stock is trading at $240, aim for a $252 strike (5% OTM). That's the sweet spot for most investors: reasonable income without giving up too much upside.
Step 3: Calculate Your Real Income
Here's where investors fool themselves. They count the premium as 100% profit. It's not.
The Real Math
Gross premium received: $150 (example) Minus broker commission: -$10 Minus bid-ask spread loss: -$5 Net profit from one cycle: $135
Annualized income (monthly strategy):
- $135 per cycle × 12 cycles per year = $1,620 annual income
- On a $24,000 stock position, that's 6.75% real annual yield
Not 18%. Real. That's still excellent, but it sets the right expectations.
Income Calculation Formula
For one cycle of covered calls:
Real Income = (Premium collected - Commissions - Bid-ask loss) × Number of 100-share blocks
Annualized Yield = (Real Income per cycle) × (365 / Days held) / Stock position value
Realistic Income by Expiration
Weekly coverage calls (7 DTE):
- Premium per cycle: 0.3-0.7% of stock value
- Net income per cycle: 0.2-0.6%
- Cycles per year: 52
- Annual yield: 10-30% (assumes flawless execution)
- Realistic annual yield for most traders: 12-18%
Monthly covered calls (30 DTE):
- Premium per cycle: 1-2.5% of stock value
- Net income per cycle: 0.7-2%
- Cycles per year: 12
- Annual yield: 8-24%
- Realistic annual yield for most traders: 12-18%
Extended covered calls (45 DTE):
- Premium per cycle: 1.5-3.5% of stock value
- Net income per cycle: 1-3%
- Cycles per year: 8
- Annual yield: 8-24%
- Realistic annual yield for most traders: 12-18%
Notice: All three end up in the same range (12-18%) for realistic traders. The difference is time commitment, not total income.
Step 4: Execute the Trade
Here's a step-by-step walkthrough on Interactive Brokers (the most popular platform for options):
On Interactive Brokers:
- Log in and navigate to your account
- Search for the stock (e.g., "AAPL")
- Right-click on the stock, select "Trade > Covered Call" or go to the options chain manually
- Select the expiration date you want (7 DTE, 30 DTE, etc.)
- Select the strike price using your framework above
- Set order type: LIMIT (never use MARKET for options)
- Set your limit price at the bid price or slightly below the mid-price
- Review the order:
- Shows: sell to open 1 call
- Shows: receive premium
- Shows: impact on your portfolio
- Click TRANSMIT
- Wait for fill (usually fills within a few seconds to a few minutes)
Pro tips:
- Sell LIMIT, not MARKET (you'll get better prices)
- Execute during market hours, 10 AM - 2 PM ET (highest volume/tightest spreads)
- If order doesn't fill in 5 minutes, cancel and try 5 cents lower premium
On Fidelity:
- Search for the stock
- Click "Trade Options" in the ticker quote
- Select "Sell to Open"
- Choose call, select expiration and strike
- Set LIMIT price
- Review and send order
On Schwab:
- Go to "Trade" > "Options"
- Search for the stock
- Select "Sell Call" (covered call is automatic if you own shares)
- Choose expiration and strike
- Set LIMIT price
- Review and send
All brokers follow the same logic. The button names differ, but the workflow is identical.
Step 5: Manage Your Position
Once you've sold the call, three things can happen:
Scenario 1: Stock Stays Below Strike (Most Likely, ~60% of time)
What happens:
- Option expires worthless
- You keep your shares
- You keep the premium
- Your account shows $150 gain (from the premium)
What you do:
- Wait for expiration (4-5 days for weeklies, 25-30 for monthlies)
- Let it expire
- Immediately sell a new call (repeat the cycle)
Income: You capture 100% of the premium
Scenario 2: Stock Rises Above Strike (Assignment)
What happens:
- Shares get called away at your strike price
- Your broker automatically sells your shares at the agreed strike
- You get the share price + premium
Example:
- You sold 30 DTE call at $250 strike, collected $150
- 25 days later, stock is at $260
- Assignment happens automatically
- You receive: $250 (strike price) + $150 (premium) = $400 per share profit
What you do:
- Decide: reinvest the capital in the same stock or move to something else
- Either way, you're done with that position
- If you reinvest, set up new covered calls
Income: You capture 100% of the premium + the upside to the strike price
Scenario 3: Stock Drops Below Purchase Price (You're Underwater)
What happens:
- Your shares decline
- Your option also expires worthless
- The premium helps offset the stock loss
Example:
- You bought Apple at $240, sold 30 DTE call at $250
- Stock drops to $220
- You lost $20 per share ($2,000 on 100 shares)
- But you kept the $150 premium (now worth ~$150 cash in your account)
- Your real loss: $2,000 - $150 = $1,850
What you do:
- You have a choice:
- Sell more covered calls (use premium to lower your average cost)
- Hold and wait for recovery
- Close the position and move on
Income: You capture 100% of the premium (which helps soften the loss)
Rolling: When and How
Rolling is when you close a covered call position before expiration and immediately open a new one at a later date and/or different strike.
When to roll:
- Stock is rising and approaching your strike (you want to capture more upside)
- Volatility dropped (you got paid less than expected and want to try again)
- You want to extend the trade (collect more premium later)
Real example:
- You sold 30 DTE call at $250 strike for $150
- Stock is now at $248, with 5 days left
- Option is worth $30 now
- You can:
- Buy to close at $30 (realize $120 profit, keep stock)
- Immediately sell a new 30 DTE call at $255 for $100
- Net result: $120 + $100 = $220 total profit across both trades
How to roll on Interactive Brokers:
- Right-click on position, select "Close"
- Set LIMIT price at the current bid
- Immediately sell a new call using the same process
- Combine both in a single order (reduces commissions)
Pro tip: Most brokers have a "roll" function that combines buy-to-close + sell-to-open automatically. Use it—it's faster and cleaner.
Putting It Together: A Real Portfolio Example
Let's say you have $50,000 to invest. Here's how to deploy covered calls:
Portfolio Setup
| Stock | Shares | Cost | Value | Strategy |
|---|---|---|---|---|
| Apple (AAPL) | 150 | $36,000 | $36,000 | 30 DTE, 5% OTM |
| Coca-Cola (KO) | 200 | $14,000 | $14,000 | 30 DTE, 3% OTM |
| Total | — | $50,000 | $50,000 | — |
Monthly Income (Goal: 1.5% per cycle)
| Stock | Strike | Premium (collected) | Income After Commissions | Target Annualized |
|---|---|---|---|---|
| AAPL (150 shares) | 5% OTM | $300 | $270 | $3,240 |
| KO (200 shares) | 3% OTM | $120 | $100 | $1,200 |
| Total Monthly | — | $420 | $370 | $4,440/year |
Real annual yield: $4,440 / $50,000 = 8.9% (conservative, realistic)
Execution Calendar
| Week | Action |
|---|---|
| Week 1 | Sell AAPL 30 DTE call at $252, sell KO 30 DTE call at $23 |
| Weeks 2-4 | Monitor; adjust if stock > strike |
| Week 5 | Let expire or close; immediately sell new calls |
| Repeat | Every 30 days |
Common Mistakes (And How to Avoid Them)
Mistake 1: Selling too close to the money
- "I'll sell at $240 and pocket $500 premium"
- Then stock rises to $245, calls get assigned, you're kicking yourself
- Fix: Use the 5% OTM rule. It's boring, but it works.
Mistake 2: Treating premium as pure profit
- Collect $300, think you made $300
- Forget about commissions, taxes, bid-ask spread
- Fix: Always subtract 10-15% for friction costs
Mistake 3: Selling calls on stocks you don't want to own
- "I'll sell the call, collect premium, and never get assigned"
- Assignment happens; you're forced to sell; you hate it
- Fix: Only sell calls on positions you genuinely own and are comfortable exiting
Mistake 4: Not tracking assignment dates
- Sell call expiring Dec 22, forget about it
- Wake up Dec 23, your shares are gone
- Fix: Set calendar alerts 1 day before expiration
Mistake 5: Chasing yield
- Sell 10-12% OTM calls hoping for huge premiums
- Get crushed if stock rises slightly
- Fix: Stick to 5% OTM. The consistency beats the home runs.
Tax Considerations
Short-term gains (if assigned within 1 year of purchase):
- Taxed as regular income
- Up to 37% federal tax (depending on bracket)
- Plus state tax
Long-term gains (if assigned after 1 year of purchase):
- Taxed at 15-20% federal rates
- Much better than short-term rates
Premium received:
- Taxed as short-term capital gain (ordinary income rates)
- Even if you hold the position > 1 year
Pro tip: Hold your shares > 1 year before selling calls. Assignment then locks in long-term capital gains rates. For premium, there's no way around it—it's always ordinary income.
Getting Started: Your Action Plan
This week:
- Pick 2-3 stocks you own (or want to own)
- Research their options chains (volume, bid-ask spreads)
- Set up a paper trade account (practice selling calls)
- Execute 1 real covered call trade
Next month:
- Let first call expire (or roll it)
- Track the actual income received
- Calculate real yield (after commissions)
- Decide: weekly, monthly, or extended strategy
Going forward:
- Add 1-2 more positions per month
- Build to 5-10 covered call positions
- Automate the calendar (repeat every 30 days)
- Track total income in a spreadsheet
Final Thoughts
Covered calls aren't complicated. They're boring, honestly. Sell a call, collect premium, wait, repeat. No drama, no get-rich-quick, just steady 10-15% annual income.
But that compound effect is powerful. $50,000 growing at 12% annually becomes $75,000 in 4 years. $75,000 becomes $112,000 in 8 years.
The key is consistency: pick a strategy (weekly, monthly, or extended), stick to your 5% OTM rule, and automate the calendar.
That's how covered calls become your income machine.