Home › Guides › Options: beginner questions
What is a "good" premium for a covered call?
A good premium is one that pays you fairly for the risk you're taking, on a stock you'd be glad to keep or sell. Measure it as a share of the stock price for the days the call runs. Then treat an unusually big number as a warning, not a prize.
The short answer
There's no magic number. But there's a useful yardstick: the premium as a share of the stock price, for the days you'll hold the call. A $0.50 call on a $50 stock is 1% of the share price; a $1.50 call is 3%. Compare that to the same strike distance and the same days on other stocks, and you'll see what "normal" looks like.
What makes a premium good isn't that it's big. It's that it's fair for a stock you actually want to own, at a strike you'd happily sell at. A big premium on a stock you'd hate to be stuck with is a bad premium.
The yardstick, and what it is not
A yardstick is for comparing, not for targeting. "I need 2% of the share price every 30 days" is how people end up selling calls on the wrong stocks, because only the wrong stocks pay that much in a calm month.
| Call, 30 days out, strike ~10% above price | Premium as a share of the stock price | What it usually means |
|---|---|---|
| Large, steady company | Under 1% | Calm stock; the market expects small moves |
| Mid-size, normal volatility | Around 1% to 2% | The usual range for most names |
| Volatile stock, or earnings inside the window | 3% and up | The market expects a big move, in either direction |
Premium is set by Implied volatility. The more the market expects the stock to move, the more it pays you to cap your upside. That's the whole reason a big premium is a warning: someone is paying extra because they think the stock could jump, or fall, a lot. See implied volatility explained.
A worked example (an illustration, not a trade idea)
You own 100 shares of two made-up stocks, each bought at $50. Both have a 30-day $55 call on the chain.
- Stock A (calm): the $55 call pays $0.50. You'd collect $50.
- Stock B (earnings in two weeks): the $55 call pays $2.00. You'd collect $200.
Stock B looks four times better. Here's the month for the owner of B:
| Stock B at expiry | What happens | Shares | Premium | Total |
|---|---|---|---|---|
| $62 (earnings beat) | Called away at $55 | +$500 | +$200 | +$700 (capped; a plain holder has +$1,200) |
| $55 | Called away or expires | +$500 | +$200 | +$700 |
| $50 | Call expires | $0 | +$200 | +$200 |
| $40 (earnings miss) | Call expires | −$1,000 | +$200 | −$800 |
| $35 (bad miss) | Call expires | −$1,500 | +$200 | −$1,300 |
The $200 was the market's price for a stock that could land at $35 or $62. On the miss, the "good" premium covered less than a fifth of the damage.
A premium is what you're paid to carry a risk. A bigger premium means a bigger risk, every time.
Three checks that matter more than the size
- Would I be glad to sell at the strike? If being called away at $55 would annoy you, the premium doesn't matter. See whether a call fits the shares you already own.
- Is there an earnings date or ex-dividend date inside the window? Either can make the premium look rich and the month go badly. Check before every trade.
- Is the strike above what I paid? A call struck below your cost locks in a loss on the shares if it's exercised.
Pass those three, and a premium in the normal range for that stock is a good premium. Fail any of them, and no number is.
What "normal for this stock" looks like
Open the Options chain and write down the premium as a share of the stock price for the strike you'd use. Do it for a few weeks on the same stock. You'll soon know what calm looks like and what a spike looks like. How to read an options chain shows where each number lives.
That's the same habit that keeps the wheel strategy honest: pick the stock first, then accept the premium it offers. Not the other way around. The put side has the same shape: what delta should I sell puts at? And for what a month of this really costs, read why did my covered call lose money today?
Questions
Is a higher premium always better for a covered call?
No. A higher premium means the market expects a bigger move. You're paid more because the chance of a sharp drop, or of being called away far below the stock's new price, is higher.
How do I compare premiums across different stocks?
Divide the premium by the share price, for the same strike distance and the same number of days. That gives a share-of-price figure you can line up side by side.
Why is the premium on my stock so small?
Because the market expects it to be calm, or the strike is far from the price, or expiry is close. A small premium on a stock you want to keep is fine. Don't move to a closer strike or a riskier stock to chase a bigger one.
Should I sell the call with the highest premium on the chain?
No. The highest premiums are at strikes near or below the price, which cap you right away, or on dates that include earnings. Pick the strike you'd be glad to sell at, then take whatever it pays.
The Options Wheel System · $99 · one payment
Learn the whole wheel, in order — then use it for life.
22 plain-English modules from complete beginner to running the wheel: covered calls, cash-secured puts, assignment, rolling, the math and the risk rules — with a scored quiz after every part and a daily deals board that applies the same rules to real markets.
See What’s Inside the Course One payment · Lifetime access · Education only, not adviceNot sure the wheel is for you?
Take the 2-minute trader test Try everything free first — the whole library costs nothing. · Try our free TradingView indicators (they work in the TradingView phone app)One chart idea a day, in plain English. Follow along: