In-the-Money (ITM) Covered Calls

Selling ITM covered calls is an advanced strategy with specific use cases.

What is an ITM Covered Call?

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Strike price is below current stock price.

Example:

  • Stock at $100
  • Sell $95 call (ITM)
  • Premium: $7.00 ($5 intrinsic + $2 time value)

    • Why Sell ITM Covered Calls?

    1. Maximum Premium

  • Collect more dollars upfront
  • Highest absolute premium available

    • 2. Downside Protection

  • Higher premium provides more cushion
  • Break-even is lower than OTM calls

    • 3. Bearish Outlook

  • Expect stock to decline
  • Want protection while holding

    • The Trade-Off

    ITM calls sacrifice upside for protection:

  • You'll likely be assigned
  • Miss any gains above strike
  • But have more premium cushion below

    • Example Comparison

    Stock at $100, 30-day options:

    | Strike | Premium | Break-Even | Max Gain | $105 (OTM)$2.00$98$700 $100 (ATM)$4.00$96$400 | $95 (ITM) | $7.00 | $93 | $200 |

    ITM has lowest break-even but also lowest max gain.