Tackle Today: Covered Call Strike Selection
March 7, 2023
40 delta or 20 delta?
Traders,
Last night we hosted another Tackle 101 webinar on our YouTube channel focusing on strike selection for covered calls. You can view it here. Traders face multiple choices when building a covered call position. One of the most challenging is settling on the right strike price. Fundamentally, you have two options: sell a high delta close-to-the-money call for a higher premium or sell a low delta far-out-of-the-money call for a lower premium. The first is represented by a 40-delta and the second by a 20-delta.
Here are a few different characteristics of each.
40-delta covered call: more premium, more downside protection, more potential cash flow, higher probability of profit in the overall position, less ROI.
20-delta covered call: less premium, less downside protection, less potential cash flow, lower probability of profit in the overall position, higher ROI.
Selling 40-delta-covered calls is more defensive, and selling 20-delta-covered calls is more offensive. Some traders vary which strike they sell each month depending on their bias on the stock. Others opt for consistency and sell the same one regardless of market conditions. One effective way to learn the difference is to paper trade both simultaneously. With time, you’ll choose what works best for you.
Tackle 101: Covered Call Strike Prices
Chart of the Day: Apple (AAPL)
Apple shares jumped on Monday following an analyst upgrade. Prices are now wrestling with overhead resistance near $155.
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