In-The-Money Covered Call

Writing in-the-money calls is a good strategy to use if the options trader is looking to earn a consistent moderate rate of return.

Profit is limited to the premium earned as the writer of the call option will not be able to profit from a rise in the price of the underlying security.

Offers more downside protection as premiums collected are higher than writing out-of-the-money calls.

Try the In-The-Money Covered Call Calculator

Limited profit

As the striking price is lower than the price paid for the underlying stock, any upward price movement will not benefit the call writer since he has agreed to sell the shares to the option holder at the lower striking price. Therefore, the maximum gain to be made writing in-the-money calls is limited to the time value of the premium at the time of writing the call.

Greater downside protection

As the premiums received upon writing in-the-money calls are higher than those received for writing out-of-the-money calls, downside protection is greater as the higher premium can better offset the paper loss should the stock price go down.

Breakeven Point(s)

Example

Suppose the stock XYZ is currently trading at $50 in June. An options trader decides to write a JUL 45 Covered Call for $7. He pays $5000 for the 100 shares of XYZ and receives $700 in premium giving a net investment of $4300.

The stock then rallies to $55 at expiration and the call gets assigned. As per the options contract, the trader has to sell the 100 shares of XYZ at the striking price of $45 and so he receives $4500 for the shares sold. Since his original investment is $4300, his net profit for the entire trade is only $200.

However, should the stock price go down to $45 instead, he still makes a profit since the $700 in premiums received more than offset the $500 in paper loss of the 100 shares he held which has lost $5 a share in value.

At $45, the call most likely will not get assigned since there is no intrinsic value left in the option. Since the shares did not get called away, the call writer can either sell the shares for $4500 giving him a net profit of $200 for the entire trade or write another call against the shares held.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

Uncovered Put Write

Stock Repair Strategy

Covered Straddle

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.