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Module 5 Quiz — Covered Call Leg & Exit

5 questions · study aid format (answers + rationales visible). Complete after Module 5.

Q1. Your "true" cost basis after assignment is:

  1. The strike price you got assigned at
  2. ✓ The strike price MINUS all premium collected (original put + any roll credits)
  3. The current market price of the shares
  4. The broker-reported cost basis (usually equals the strike)
The broker shows the assigned price. Your REAL cost basis is that price minus every dollar of premium you kept during the trade. Every subsequent decision depends on this number.

Q2. When selling a covered call after assignment, at what strike range should you focus?

  1. ✓ At or above your true cost basis, delta 0.20–0.30
  2. Below current price, delta 0.50+ for maximum premium
  3. The current market price exactly, any delta
  4. The strike you originally sold the put at, regardless of current price
Strike at or above true cost basis means being called away IS a profit. Below cost basis and you'd lock in a loss if called out.

Q3. Your assigned stock has dropped $8 below your cost basis. The "repair playbook" recommends:

  1. Panic-sell the shares immediately at a loss
  2. Stop selling calls to preserve any potential recovery
  3. ✓ Sell shorter-DTE, lower-delta calls (~0.15) at strikes above current price but below cost basis if needed, to keep collecting premium while you wait
  4. Buy more shares to average down
Keep selling calls to reduce effective cost basis. Lower delta = lower probability of getting called out at a loss. Wait for recovery.

Q4. Why do we prefer to skip selling calls below true cost basis in normal conditions?

  1. It's against SEC regulations
  2. The broker will reject the order
  3. ✓ Being called away below cost basis locks in a realized loss on the wheel cycle
  4. Below-cost-basis calls pay no premium
The whole design of the wheel is to make each leg profitable. Selling a call that could exit you at a loss defeats the strategy. Only do it deliberately if you want out of the position.

Q5. In a full closed wheel cycle (put → assignment → covered call → called away), you collect income from:

  1. Only the initial put premium
  2. Only the capital gain when shares are called away
  3. ✓ Put premium + call premium + capital gain (strike − cost basis) + any dividends held during the cycle
  4. Only from stocks that pay dividends
A complete cycle can generate income from 3–4 sources. This is why the wheel targets 10–20% annualized on quality names — the stacked income sources compound.