The Short Answer: It Depends on What You're Optimizing For

A far out-of-the-money (OTM) covered call collects less premium but lets your stock run higher before it gets called away. A near-the-money covered call collects more premium but caps your upside almost immediately. Neither is universally better — the right choice depends on your income target, your willingness to sell the stock, and how much the stock is moving right now.

Most retail covered-call writers default to one approach without ever running the numbers side by side. This article does that work for you, using real AAPL strike prices so you can see exactly what each choice costs and earns.

What 'Far OTM' and 'Near the Money' Actually Mean

The Options Industry Council (OIC) defines a call option as out-of-the-money when its strike price is above the current stock price. 'Near the money' means the strike is close to where the stock is trading right now — typically within 1-3% above the current price. 'Far OTM' is loosely defined, but most traders use it to mean a strike that is 5-10% or more above the current price.

Delta is the fastest way to think about this. A near-the-money call might carry a delta of 0.40-0.50, meaning the option price moves about $0.40-$0.50 for every $1 move in the stock. A far OTM call might have a delta of 0.10-0.20. Lower delta = lower premium collected, but also a lower chance the stock closes above your strike at expiration, according to OIC educational materials.

Theta (time decay) works in your favor on both, but it works faster on near-the-money options in dollar terms because those options carry more time value to decay away.

Side-by-Side AAPL Example: Same Stock, Two Different Strikes

Let's say you own 100 shares of Apple (AAPL) at $195 per share. You're looking at a 30-day covered call expiring in roughly one month. Here are two realistic strike choices based on typical AAPL option pricing at that stock level:

Option A — Near the Money ($200 strike, ~2.6% OTM): - Premium collected: $3.20 per share, or $320 per contract - Delta: approximately 0.38 - Breakeven on the downside: $195 - $3.20 = $191.80 - Maximum gain: ($200 - $195) + $3.20 = $8.20 per share, or $820 per contract - Annualized yield on the premium alone: roughly 19.7% ($3.20 / $195 × 12 months)

Option B — Far OTM ($210 strike, ~7.7% OTM): - Premium collected: $0.85 per share, or $85 per contract - Delta: approximately 0.12 - Breakeven on the downside: $195 - $0.85 = $194.15 - Maximum gain: ($210 - $195) + $0.85 = $15.85 per share, or $1,585 per contract - Annualized yield on the premium alone: roughly 5.2% ($0.85 / $195 × 12 months)

The near-the-money call pays you $235 more per contract right now. The far OTM call lets you keep $10 more per share in stock appreciation if AAPL rallies hard. The question is: how often does AAPL actually move 7.7% in a single month? Historically, that happens but it is not the base case. If AAPL stays flat or drifts slightly higher, Option A wins every time.

When Does the Far OTM Strike Actually Win?

The far OTM strike wins in one specific scenario: the stock makes a large move upward during the option period. If AAPL jumps from $195 to $212 before expiration, the $200 call writer gets called out at $200 and misses $12 of that move. The $210 call writer captures $15 of it and still keeps the $0.85 premium.

Far OTM calls also make sense when implied volatility is low. When IV is compressed, near-the-money premiums shrink faster than far OTM premiums on a percentage basis, making the trade-off less attractive. CBOE's VIX is a useful proxy — when VIX is below 15, many traders shift slightly further OTM because near-the-money premiums feel thin relative to the assignment risk they carry.

A third use case: you bought the stock recently at a lower cost basis and you have a specific price target where you'd be happy to sell. Writing a call at or just above that target is a disciplined way to set a limit sell and get paid to wait. This is sometimes called a 'target exit' strategy in OIC educational content.

Finally, if you are in a high tax bracket and want to avoid a short-term capital gain on the stock, staying far OTM reduces assignment probability. The IRS taxes short-term gains (stock held under one year) as ordinary income, which can be significantly higher than long-term capital gains rates. Canadian investors should check CRA guidance on option premiums, which are treated as capital gains or income depending on trading frequency and intent.

The Real Risks of Each Approach — Not Buried at the Bottom

Near-the-money risks:

1. Assignment is likely if the stock moves up at all. Once the stock closes above your strike, your broker will typically process automatic assignment at expiration. FINRA and the OIC both note that American-style equity options can be exercised early, though this is rare for calls unless a dividend is involved.

2. You cap your upside hard. If AAPL announces a surprise product and jumps 12% in a week, you participate in only the first 2.6% of that move. The rest goes to the option buyer.

3. The premium does not fully protect you in a sharp selloff. $3.20 of downside cushion sounds good, but a 10% drop in AAPL is a $19.50 loss. The covered call reduces that loss to $16.30 — better, but not a hedge.

Far OTM risks:

1. You collect very little income. $85 per contract on a $19,500 position is a 0.44% return for 30 days. If the stock drops 5%, your premium barely registers.

2. It creates a false sense of safety. Some traders write far OTM calls and feel 'protected' when in reality they have almost no downside buffer. The covered call strategy is not a hedge — it is an income strategy with limited downside offset, as the OIC clearly states in its covered call education materials.

3. Opportunity cost is real. Tying up 100 shares in a covered call position — even a far OTM one — means you cannot sell those shares freely without first buying back the call. If the stock drops sharply and you want to cut losses, you must close both legs.

A Simple Decision Framework for Choosing Your Strike

Run through these four questions before you write any covered call:

1. Do I want to keep this stock? If yes, go further OTM. If you are neutral to selling it at a profit, go near the money.

2. What is implied volatility doing right now? Check the stock's IV rank or IV percentile. High IV (above the 50th percentile for that stock) means near-the-money premiums are rich — collect them. Low IV means near-the-money premiums are thin — consider going further OTM or waiting.

3. Is there a catalyst coming? Earnings, product announcements, and Fed meetings spike volatility and option prices. Many experienced covered-call writers avoid selling calls in the week before a known earnings date because the stock can move sharply in either direction. CBOE data consistently shows that implied volatility rises into earnings and collapses after — a dynamic called 'IV crush.'

4. What is my income target? If you need 1% per month from your portfolio to meet a cash-flow goal, a far OTM call on a low-volatility stock will not get you there. Run the math first. A near-the-money call on a higher-volatility name like NVDA will generate more premium than a far OTM call on a slow-moving utility stock.

A practical middle ground that many retail traders use: write calls at a delta of 0.25-0.30. That puts you roughly 3-5% OTM on most large-cap stocks, collects meaningful premium, and still gives the stock room to breathe. It is not a rule — it is a starting point for your own analysis.

Tax Treatment: One More Reason Strike Choice Matters

The IRS has specific rules about covered calls and holding periods that every US trader should know. Under IRS Publication 550, writing a deep in-the-money call can suspend the holding period on your stock for long-term capital gains purposes. Far OTM calls generally do not trigger this rule, but near-the-money calls can depending on the strike and time to expiration.

The premium you collect from selling a covered call is not taxed when you receive it. It is taxed when the position closes — either through expiration (premium becomes a short-term gain), buyback (gain or loss on the option), or assignment (premium gets added to the proceeds from the stock sale). The IRS treats these differently depending on how the position closes, so keep clean records.

Canadian investors face a different framework. The CRA generally treats option premiums as capital gains if you are an investor, but as business income if you trade frequently. The distinction matters because capital gains are taxed at 50% inclusion, while business income is fully taxable. If you are writing covered calls regularly in a non-registered account, consult a tax professional familiar with CRA's position on derivatives income.

Which covered call strike makes more money — far OTM or near the money?

Near-the-money calls collect significantly more premium upfront, which means more income if the stock stays flat or moves only slightly. Far OTM calls earn less premium but let you keep more stock appreciation if the stock rallies hard. Over most market conditions, near-the-money calls generate higher annualized income from premium alone.

What delta should I use when selling a covered call?

Many retail covered-call traders target a delta between 0.20 and 0.35, which typically puts the strike 3-6% above the current stock price. This range balances meaningful premium collection against a reasonable chance of keeping your shares. The OIC notes that delta also approximates the probability the option expires in the money, so a 0.25-delta call has roughly a 25% chance of assignment at expiration.

How far out of the money should I sell a covered call?

There is no single right answer, but a common starting point is 3-5% above the current stock price for a 30-day expiration. Higher-volatility stocks like NVDA may justify going further OTM because premiums are richer even at wider strikes. Lower-volatility stocks may require going near the money to collect any meaningful income.

Can I lose money selling a covered call?

Yes. The premium you collect reduces your loss but does not eliminate it. If you own 100 shares of AAPL at $195 and collect $3.20 in premium, a drop to $170 still costs you $21.80 per share after the premium offset. Covered calls are an income strategy, not a hedge, as the OIC clearly states in its investor education materials.

What happens to my covered call if the stock gets called away?

If your stock closes above the strike at expiration, the option buyer will typically exercise, and your broker will sell your 100 shares at the strike price — this is called assignment. You keep the premium you collected plus any gain from the stock's appreciation up to the strike. FINRA rules require brokers to process standard equity option assignments by the next business day after expiration.

Does writing a covered call affect my taxes on the stock?

It can. Under IRS Publication 550, writing a call that is deep in the money may suspend your stock's holding period, which could convert a long-term gain into a short-term gain if the stock is assigned. Far OTM calls generally do not trigger this rule. Canadian investors should note that the CRA may treat frequent option writing as business income rather than capital gains, which carries a higher tax rate.