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Out-of-the-money covered calls: the default, and how delta sets the dial

An out-of-the-money covered call uses a strike above the current stock price. The stock can rise up to the strike and the gain is yours; the premium is smaller because the strike is further away. It's the default most sellers use, and delta is the dial that sets how far away.

Options guide · 7-minute read · Updated 2026-10-26

What "out of the money" means for a call you sell

A call is out of the money when the stock is below the strike. XYZ at $50, a $55 call: out of the money by $5.

All of the premium is Time value. None of it is the stock's own price coming back. If the stock sits still, the whole premium melts to you by expiry. That's why this is the default Covered call in the wheel strategy.

For the other settings, see at-the-money and in-the-money covered calls.

What you get and what you give up

You keep room to run. From $50 up to the $55 strike, the rise is yours. The call only caps you above $55.

You collect less. The further the strike, the less the premium. A $55 call pays less than a $52 call, which pays less than a $50 call.

You're less likely to be called away. The stock has to climb $5 before assignment is in play.

The cushion is thin. A $1.00 call cushions $1 of a fall. The rest of the fall is yours.

Delta is the dial

Every call on the Options chain shows a Delta. For a seller, read it two ways:

• Roughly, the chance the call finishes in the money. A 0.30-delta call is in the money at expiry about 30 times in 100, by the market's current pricing. That's an estimate, not a promise.
• How much the call moves per dollar the stock moves. A 0.30-delta call gains about $0.30 when the stock gains $1.

So delta sets the whole trade-off on one number:

Many sellers default to 0.20 to 0.30 delta. It's the middle of the dial: enough premium to be worth the cap, enough room that most months the shares stay. Our greeks guide covers delta in full.

A worked example at 0.25 delta (an illustration, not a trade idea)

You own 100 shares of a made-up stock, XYZ, at $50. On the 35-day chain, the $55 call shows a delta of 0.25 and a bid of $1.00. You sell it and collect $100.

The first row is the honest one. Out-of-the-money calls have the thinnest cushion of the three settings. The $100 covered one eighth of the $800 fall. If the fall worries you, the call was never the tool for that; the share size was.

The last row is the other side. At $62, a plain holder has $1,200. You have $600. That's the deal you took for the premium. See covered call when the stock goes up.

Picking the strike, in practice

1. Open the chain 30 to 45 days out.
2. Find the calls with delta between about 0.20 and 0.30.
3. Among those, prefer the strike with the most Open interest and a tight bid-ask spread. A liquid strike beats a "perfect" one.
4. Check the strike is above your cost and at or above the price you'd be glad to sell at.
5. Check for earnings and ex-dividend dates inside the window.
6. Note the bid. That's your premium if you sell at the bid; try a limit a little above it.

When to move the dial

• Move delta down (further out) when you'd really rather keep the shares, when the stock has been running, or when a small premium still covers your costs.
• Move delta up (closer) when you'd be fine selling at that price, when the stock has been flat, or when you're using the call as a slow exit.
• Don't move it for the premium alone. A fatter premium at 0.40 delta is a higher chance of being called away. That's not free money; it's a different trade.

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