When Should You Sell Covered Calls?

Learn when to sell covered calls and maximise your investment returns. Discover my tips and strategies for timing your trades effectively in this step-by-step guide.

when to sell covered calls

Initiating your first covered call using a buy-write trade

Selling covered calls is often most advantageous either when initiating a long equity position (referred to as a “buy/write”) or when the equity position has already started to move in your favour.

So let’s start by assuming that you have already purchased shares at their current trading price and have decided to sell a covered call on those shares at the same moment. This is known as a buy-write trade. As a rule of thumb, below are 4 of my guiding principles that I follow for deciding when to sell a covered call and run this buy-write strategy. It’s a good idea to make a note of these and try to follow them if you are just starting out.

  1. Always be aware of the next ex-dividend date. If you buy your shares before it, you’ll bag the dividend. Just remember that the share price will theoretically drop by the same amount as the dividend on the ex-dividend date.
  2. I would largely hold off selling a covered call if the company had an earnings announcement in the near future. Shares can move around a lot if an earnings number is deemed to be better or worse than expected and that’s a risk we should easily avoid. TradingView is pretty good at displaying earnings dates on all stocks and they offer a decent free version too. Or you can use a site called Earnings Whispers but it’s more focussed on the US stock market.
  3. Selling a covered call is a bullish strategy, which means it’s not advisable to enter a position when the broader market, sector, or the stock itself is clearly in a downtrend.
  4. There will be a time when the share price and the strike price may be too far apart to result in a yield that you are happy with. In this case, you will need to wait for the share price to move closer to a suitable strike price.
when to sell covered calls

🚀 Taking advantage of green market days

I don’t like the idea of sitting in front of my computer all day so what I like to do is if I see the market is having a good green day I will load up my options chain (I use Interactive Brokers) and have a look at what premiums I can get.

If I can sell a covered call at a suitable strike price for a good premium (18-24% annualised return is what I typically aim for) then I will make the trade.

Certainly, I could have made wiser decisions by waiting a few days, as there was ample time available. However, I do not possess a crystal ball.

I prefer to depend on the certainty of the current opportunity rather than take a risk on a potentially superior—or perhaps inferior—scenario that may present itself in the future. Remember, it’s very hard to time the market.

Selling covered calls when you already on the shares

So, now we have considered the situation where we are initiating a covered call campaign from scratch after a buy-write trade. Let’s now have a look about the more likely scenario where we already own the shares and are looking to sell a covered call on them.

This situation can come about because you already own the shares from some previous unrelated trade, or your previous call has expired, and you are now able to sell another covered call on your position.

At the time of writing this article I have a position I have been in for several months in T Rowe Price Group Inc, ticker symbol TROW.

This is a stock I am happy to own long term, pays a handsome dividend (over 4%) and is a great stock to use to implement the wheel style option strategy.

So far I have made over $2,000 in premium income on TROW over the last 4 months and during this time managed to reduce my cost price per share down from $118 to $105.28 per share.

When you own the shares already your decision to sell a call becomes a little easier as this is the case for me on my 200 shares in TROW.

Typically, I adhere to a principle of selling a call option on shares I possess, provided I can identify a profitable outcome in case the call is exercised. While this approach may not yield the highest annualised return, it is a risk I am inclined to accept.

After all, circumstances could worsen the next day, leaving me regretful for not securing a reasonable yield when it was within reach. This may mean accepting say a 15% annualised return yield or possibly lower, but it’s still money in my pocket and the strike price is higher than my cost basis per share so it’s a win-win situation in my view.

To summarise then, if you don’t sell a call then you are not bringing in any premium, so the ideal situation is usually that you should always have sold a call.

Here are a few factors to look at that may influence your decision:

📰 Earnings announcement: Since you already possess the shares, it is inevitable to encounter an earnings announcement. Consequently, I would not allow this event to significantly impact my decision regarding when to sell a covered call. In fact, the inflated premiums during this time often present an opportune moment to secure attractive profits. Should the shares decline in response to the announcement, you would have gained valuable income that can partially offset any paper losses incurred. On the other hand, if the shares surge in value, you can simply execute your predetermined plan of selling the shares at the previously established level, resulting in no negative consequences.

🤑 Ex dividend date: It is important to take note of the upcoming ex-dividend date. If you sell your call option in a way that extends beyond this date, there is a slight possibility of early exercise. I will provide further explanation about this later on, but essentially, it means your call option will be exercised sooner than expected. Although you will not receive the dividend, you will still retain the premium and any increase in the share price, and you will receive them earlier than anticipated, thereby resulting in a higher annualised yield. Therefore, as long as you choose a strike price that aligns with your objectives, there is no need to worry excessively about early exercise. The only exception I might consider is if there is a particularly enticing dividend approaching and it makes sense to delay selling the call until just after the ex-dividend date. This way, you can ensure receipt of the dividend and proceed with selling the call as per usual.

🌳 Wider market: Typically, I do not let the overall market conditions, sector performance, or medium-term trend of the stock dissuade me from selling calls. Since we already possess the shares, generating additional premium can only serve to benefit us.

📊 Technical indicators: I sometimes do pay attention to shorter-term technical indicators such as the RSI. If this indicator suggests that the stock was currently oversold and therefore potentially due a rebound, I would tend to wait before selling my covered calls. And this is because, if the indicator is right, you would be better waiting a week or so for the stock price to rise so that you can sell a call with a higher strike price and usually better premiums. Remember, that the higher the strike price the better if your call is exercised as you are selling your shares for a higher price.

🧐 Is there always a trade to make? Well, not always. As we have witnessed, practical circumstances can sometimes hinder theoretical considerations. Despite all other factors being favourable, there might be instances where a suitable call option with a strike price sufficiently close to the share price is unavailable, thereby limiting the potential for a satisfactory yield. Regrettably, in such cases, it becomes necessary to exercise patience and await a more favourable alignment of conditions.

I hope you found this article enjoyable. In the spirit of transparency, I am presently generating approximately $5,000 per month in additional earnings by engaging in the sale of covered calls and cash secured puts.

The art of selling options possesses the potential to furnish your family with supplementary income on a monthly basis, enabling a more enriched life. Through the proceeds obtained from options trading, I recently financed a memorable trip across Europe for my wife and son.

As always, good luck and happy investing!

Read Also: What Are Covered Calls: A Guide to Generating Income in the Stock Market


What is a covered call?

A covered call is an options trading strategy where an investor who owns a stock sells a call option on that stock. The investor receives a premium for selling the call option and is obligated to sell the stock at the strike price if the option is exercised.

When should I sell a covered call?

There are several factors to consider when deciding when to sell a covered call, including the ex-dividend date, earnings announcements, market trends, and technical indicators. It’s important to have a predetermined plan and to stick to it.

What is the risk of selling a covered call?

The main risk of selling a covered call is that the stock price may rise above the strike price, resulting in the investor selling the stock for less than its current market value. However, the premium received for selling the call option can partially offset any potential losses.

How do I determine the strike price for a covered call?

The strike price for a covered call should be higher than the investor’s cost basis for the stock and should align with their investment objectives. It’s important to consider the potential yield and the likelihood of the option being exercised.

Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!
Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!

About DividendOnFire.com

Welcome to Dividend On Fire, we are a site dedicated to options trading! We specialize in helping investors generate passive weekly or monthly income through selling cash secured puts and covered calls.

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