How Far Out of the Money Should You Sell Covered Calls on NVDA?

If you own NVIDIA (NVDA) shares and are considering selling covered calls, one of the first questions you'll face is:

How far out of the money should the strike price be?

At first glance, the answer seems simple. Sell a call far enough away that assignment is unlikely and collect premium.

In practice, however, strike selection is one of the most important decisions a covered call seller makes.

Choose a strike too close to the current stock price and you risk capping upside during a rally. Choose a strike too far away and the premium collected may barely justify the trade.

After managing covered calls on NVDA through both rallies and pullbacks, I've learned that there is no perfect strike price. There are only trade-offs.

What Is an Out-of-the-Money Covered Call?

A covered call consists of:

Owning at least 100 shares of stock
Selling a call option against those shares
Collecting premium upfront

An out-of-the-money (OTM) covered call means the strike price is above the current stock price.

For example:

NVDA trading at $200
Sell a $220 call

The stock can rise from $200 to $220 before the call moves in the money.

Many investors prefer OTM covered calls because they allow some participation in future upside while still generating premium income.

Why NVDA Is Different

Many traditional covered call examples use slow-moving dividend stocks. NVIDIA is not a slow-moving dividend stock.

NVDA regularly moves 5%, 10%, or even 20% within a short period of time. What appears comfortably out of the money today can become deeply in the money surprisingly quickly. This creates a unique challenge for covered call sellers.

The higher the volatility, the more premium you can collect. But the higher the volatility, the greater the chance your upside gets capped.

The Mistake I Made

One of my longest-running positions involved selling a covered call against 100 NVDA shares.

Initially, the trade looked sensible. The strike price was well above my cost basis, and the premium provided additional income.

Then NVDA exploded higher. The stock eventually traded far above the strike price, leaving the call deeply in the money.

The position remained profitable, but it created an uncomfortable situation:

The shares continued rising
My upside became capped
Rolling the call became increasingly expensive

This experience reinforced an important lesson:

The biggest risk of covered calls is often opportunity cost rather than actual loss.

How I Think About Strike Selection Today

Today I focus less on maximizing premium and more on maintaining flexibility.

When selecting covered call strikes, I ask:

Would I be comfortable selling my shares at this price?
How much upside am I willing to sacrifice?
What annualized return am I receiving for taking that risk?

If I would regret losing the shares at a particular strike, the strike is probably too low. This is especially true for growth companies like NVDA.

Using Delta to Select Covered Call Strikes

Many experienced options traders use delta as a rough probability indicator when selecting strikes.

For example:

0.10 Delta = roughly 10% probability of expiring in the money
0.20 Delta = roughly 20% probability
0.30 Delta = roughly 30% probability

Lower delta strikes generate less premium but provide more room for the stock to appreciate. Higher delta strikes generate more premium but increase assignment risk. There is no universally correct choice. The appropriate strike depends on your objectives and risk tolerance.

When Covered Calls Stop Making Sense

One lesson I continue to relearn is that covered calls work best in:

Sideways markets
Moderately bullish markets
Low-volatility environments

They become much less attractive when a stock enters a powerful bull run. During strong rallies, covered calls often underperform simply holding the shares.

That's one reason why I increasingly use other income strategies alongside covered calls.

Why I Also Use Bull Put Spreads

While covered calls remain part of my portfolio, much of my weekly premium generation now comes from bull put spreads.

Bull put spreads offer several advantages:

Defined risk
Lower capital requirements
No capped upside on long stock positions

If you're unfamiliar with the strategy, start here: Bull Put Spread Strategy: A Complete Beginner's Guide

I also compare credit spreads and cash-secured puts here: Bull Put Spread vs Cash-Secured Put: Which Is Better for Small Accounts?

What If the Covered Call Gets Challenged?

Eventually every covered call seller encounters a position that moves against them.

When a stock rallies sharply, choices typically include:

Allow assignment
Buy back the call
Roll the call to a later expiration
Roll to a higher strike price

Each adjustment involves trade-offs between premium, time, and flexibility. In my experience, rolling can often buy additional time, but it rarely eliminates the underlying challenge entirely.

Final Thoughts

There is no perfect covered call strike for NVDA. The best strike is the one that aligns with your goals. If your objective is maximizing income, you'll likely choose strikes closer to the current stock price.

If your objective is maintaining long-term ownership while generating modest income, you'll likely choose strikes further out of the money. For me, the most important lesson has been understanding the trade-off between premium and upside.

Premium can be replaced. Missing a multi-year rally in a great company is much harder to recover from.