For standard income-generating covered calls, always sell strikes at or above the current stock price. An out-of-the-money (OTM) call lets you collect premium and still benefit from stock appreciation up to the strike. An in-the-money (ITM) call below the current price is a different strategy — it provides downside protection but locks in a stock loss at assignment. Both are valid, but they serve completely different purposes.

Above Current Price (OTM) — The Standard Approach

Stock at $100. Sell $105 call for $2.00.

  • You keep premiums if the stock stays below $105
  • Stock can appreciate up to $105 before getting called away
  • Max profit: ($105 - $100) + $2 = $7/share
  • Breakeven: $100 - $2 = $98

    • This is what 90% of covered call sellers do. You're saying: "I'm happy to hold this stock, but if it rises to $105, I'll sell and pocket the premium."

    At Current Price (ATM) — Maximum Premium

    Stock at $100. Sell $100 call for $4.00.

  • No room for stock appreciation above $100
  • Maximum time value premium
  • Max profit: $4/share (premium only)
  • Breakeven: $96

    • Best for range-bound stocks where you expect minimal movement. You sacrifice all upside for maximum income.

    Below Current Price (ITM) — Downside Buffer Strategy

    Stock at $100. Sell $90 call for $12.50.

    Let's break down the $12.50 premium:

  • Intrinsic value: $10 (stock is $10 above the $90 strike)
  • Time value: $2.50 (your actual income)

    • If assigned at $90, you sell your stock for $90. Combined with the $12.50 premium, your effective sale price is $102.50 — which is above the current $100 stock price.

  • Max profit: $2.50/share (time value only)
  • Breakeven: $100 - $12.50 = $87.50
  • Protection: Stock can drop to $87.50 before you lose money

    • The ITM call provides a much bigger cushion against declines ($12.50 vs $2.00 for the OTM call). But your max profit is capped at the $2.50 of time value.

    Decision Framework

    | Your Outlook | Recommended Strike | Why | Bullish5-10% above current priceCapture some appreciation + premium NeutralAt the money or 1-2% aboveMaximize premium income Mildly bearishAt the moneyBig premium buffers expected decline Defensive5-15% below current priceMaximum downside protection | Want to exit | At the money or slightly above | Get paid to sell at your target price |

    The "Selling Below Cost Basis" Trap

    A common mistake: You bought a stock at $80. It's now at $70. You sell a $65 call for $7.00 because the premium is fat.

    If assigned at $65: You receive $65 + $7 = $72 per share. Your cost was $80. You locked in an $8/share loss.

    Rule: If you're underwater on a stock, sell calls above your cost basis whenever possible. If the stock is too far below your basis to get reasonable premium at higher strikes, you're in loss-recovery mode — not income mode.

    Better alternatives when underwater:

  • Sell calls at or slightly above the current price to collect income while waiting for recovery
  • Sell calls above your cost basis even if the premium is small
  • Accept that recovery will take months of small premiums

    • How Strike Price Affects Delta and Probability

    | Strike vs Stock Price | Delta | Probability ITM | Assignment Likelihood | 10% below (deep ITM)0.80-0.9080-90%Very high 5% below (ITM)0.65-0.7565-75%High At the money0.45-0.5545-55%Coin flip 5% above (OTM)0.25-0.3525-35%Low-moderate 10% above (OTM)0.10-0.2010-20%Low | 15% above (far OTM) | 0.05-0.10 | 5-10% | Very low |

    Matching Strike to Your Holding Period

    Short-term hold (weeks): ATM or slightly OTM. You're extracting maximum income for a short window.

    Medium-term hold (months): 3-7% OTM. Balance of income and upside.

    Long-term core holding (years): 8-15% OTM or skip the covered call during strong bullish periods. You don't want to cap the compound growth of your best stocks for a small monthly premium.

    Strike Selection Based on Implied Volatility

    When IV is high (VIX > 25), you can sell further OTM and still get solid premiums. When IV is low (VIX < 15), you need to sell closer to the money to get any meaningful income.

    High IV example (VIX at 30): Stock at $100. The $110 call (10% OTM) pays $3.50. Excellent — you get 3.5% premium with 10% upside room.

    Low IV example (VIX at 12): Stock at $100. The $110 call pays $0.40. Not worth it. The $105 call pays $1.20 — still thin. You may need to sell the $103 call at $2.00 to generate meaningful income.

    OptionsPilot's strike finder displays the premium yield, delta, and annualized return for every available strike on your holdings, color-coded by risk profile. You instantly see the tradeoff between higher income (closer strikes) and more upside room (farther strikes) without manually crunching options chains.