What nobody tells you about selling options
Selling options gets pitched as income: collect a premium, win most of the time, repeat. On one Chipotle covered call the premium is $73, the win rate is 77.1 percent and the annualized yield is 15.4 percent. All three are true. The expected value of the contract is still zero, and the rest of this page is why.
None of this is hidden. It is arithmetic the pitch leaves out, usually because the pitch is selling a course. Every figure below comes off one trade, so you can check each one against the others.
The trade, the way it gets pitched
Chipotle (CMG) at $38.40, the September 19 monthly, 45 days out. You own 100 shares, $3,840 of stock, and you sell one $42 call against them: the same contract the contract page uses to explain what an option is.
| The pitch | On this trade |
|---|---|
| Premium, paid to you today | $73 at the mid |
| Odds you keep all of it | 77.1% |
| Return on the stock, 45 days | 1.90% |
| Annualized | 15.4% |
| If the shares are called away at $42 | +$433, or 11.3% |
Every row is correct. Here is what none of them says.
1. The contract is priced to be worth nothing on average
The $42 call has a 22.9 percent chance of finishing in the money. On the paths where it does, you hand the buyer the gap between $42 and wherever CMG ends up, and under the model that priced the contract that gap averages $321.
22.9 percent of $321, discounted for 45 days, is $73. The premium. The win rate and the size of the losses are the same price written two ways, and they cancel exactly. The expected profit on the contract you sold is zero.
That is what a fair price means, and it is not a flaw in the strategy. It is the starting point, and anyone who quotes you the win rate without ever reaching the $321 is describing half a trade.
2. The edge is about nine dollars, and the spread wants some of it
If the contract is a wash, a seller's money has to come from somewhere else, and there is one place. Implied volatility tends to run a couple of points above what the stock goes on to do, because buyers of protection pay a load for it. The volatility series measures that gap at 1.9 points on its own chain.
Two points of volatility on the $42 call is worth about $9 over the 45 days. Nine dollars, on $3,840 of stock.
Then you have to trade it. The market is $0.71 bid, $0.76 ask. Sell at the bid instead of the mid and $2 of that $9 is gone before the position exists. Close it early and you cross the spread again on the way out. Over a year the spread is a real fee, and on a badly chosen strike it takes the whole edge.
3. Out of the money is not the same as safe
CMG has to rally 9.4 percent to reach $42, and the odds it finishes above the strike are 22.9 percent. The odds it trades through $42 at some point before September 19, even for an afternoon, are 46.3 percent.
So on nearly half of these trades the stock goes through your strike and the position shows a loss, and about half of those still end up expiring worthless. The gap between finishing there and going there is the most useful number on this site for a new seller. It predicts how the trade feels, and how it feels decides whether you close it at the worst possible moment.
4. A 77 percent win rate is an assignment most years
77.1 percent is per trade. Sell this call eight times a year and, if every cycle looked like this one and the cycles were independent, the chance of a whole year with no assignment is 12.5 percent.
On a covered call, assignment is not a disaster. Your shares go at $42, above where you bought them, for the $433 in the table. What it ends is the income plan. You are holding cash, the stock is higher than when you started, and the choice is to buy it back at a worse price or switch to selling puts. Most years you make that choice at least once. The screening series runs the same arithmetic on a different contract and gets 21 percent.
5. The upside is sold and the downside is kept
Both ends of the same trade.
- CMG runs to $47. Your shares go at $42. You keep the $433, and the buyer takes the other $500 of the move, for which you were paid $73.
- CMG falls 25 percent, to $28.80. The call expires worthless and you keep the $73. The shares have lost $960. Net, -$887.
The premium moves your break-even from $38.40 to $37.67. Seventy three cents. That is the entire downside protection a covered call provides, and it is why the Cboe BuyWrite index, which writes at-the-money calls every month, returned 7.91% a year over ten years against 15.50% for the S&P 500 with dividends. At-the-money writing caps harder than a $42 strike does, and the comparison page sets out the caveats. The direction does not change.
6. The annualized yield is a forecast
1.90 percent in 45 days becomes 15.4 percent a year by multiplying by 365 over 45. That multiplication assumes you get this same trade about eight times a year, at the same implied volatility, with the stock obligingly staying under the strike every time. The annualizing page lists the four assumptions buried in it.
Section 4 already priced the third one. The honest use of an annualized figure is comparing two contracts on the same day. It is not a description of your year.
7. The tax bill arrives every cycle
IRS Publication 550 (2025), Table 4-3, Puts and Calls is direct about a call you wrote that expires unexercised: "the amount you receive is a short-term capital gain." So each cycle that expires is taxed as you go, not once at the end. At an assumed 32 percent rate, the $73 becomes about $50.
If the shares are called away the premium joins the sale proceeds instead, and the gain is short or long term depending on how long you held the stock. The tax series works all three endings through one account. None of this is tax advice, so take it to whoever prepares your return.
What is left after all seven
A trade with a real but small structural edge, a lot of variance around it, and a payoff shape that suits people who were happy owning the stock anyway. That is a reasonable thing to want.
The honest reasons to sell calls survive every section above. If you were going to hold the 100 shares regardless, the call charges rent on exposure you already carry. If you would happily sell at $42, the premium pays you to set that limit order in advance. The cash-secured put is the same idea from the other side: getting paid to bid for shares you want.
What does not survive is the word income. Premium is payment for a risk you genuinely took, and on the day you took it, the price of that risk was fair.
OptionsKing gives every candidate strike a deterministic confidence score from 0 to 100 and shows you the highest-scoring handful. What a trade pays is a filter you set, not part of the order. There is no minimum score. How it works covers what the score does and does not tell you.
Questions people actually ask
Is selling options free money?
No. On the worked covered call the $73 premium is exactly what the contract's 22.9 percent chance of finishing in the money is worth, so the expected value of the contract is zero. What sellers keep over time is a volatility premium of roughly two points, about $9 on this trade, less whatever the bid-ask spread takes.
What is the catch with covered calls?
You keep nearly all of the downside and sell most of the upside. On the worked trade a 25 percent drop still costs $887 after the premium, while a rally to $47 hands $500 of the move to the buyer. The at-the-money BuyWrite index returned 7.91% a year over ten years against 15.50% for the S&P 500 with dividends.
If I win 77 percent of the time, why do I keep getting assigned?
Because 77 percent is per trade. Eight trades a year at those odds, treated as independent, give a 12.5 percent chance of a year with no assignment at all. On a covered call, assignment sells your shares at the strike, which ends the income plan until you buy back in.
Why does my short option show a loss when it is still out of the money?
Because the stock moved toward your strike and the option got more expensive. On the worked $42 call the odds of CMG trading through the strike at some point before expiry are 46.3 percent, about twice the 22.9 percent chance it finishes there.
How is option premium taxed?
Under IRS Publication 550 the premium on a written option that expires unexercised is a short-term capital gain. If a call is exercised the premium is added to the sale proceeds and the holding period of the stock decides the term. This is general information, not tax advice.
Sources
Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.
Keep reading
Do the math on your own trade
Every price in this article is an illustrative worked example, not a quote. Read Options basics for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.