Why would I write a covered call that is in the money?

Question

I am starting to learn about options trading. I am confused as i look at covered call writing examples. Why would I write a covered call that is already in the money?

Answer 1

The first sentence in the answer by Califrich was excellent. "If you write an in-the-money call, you will get more premium and more downside protection than you would writing an at-the-money or out-of-the-money call." Of course, you also have a lower maximum profit than you would get writing an at-the-money or out-of-the-money call.

I disagree with Calirich when he says "in fact, that's what you want to happen" refering to assignment. I also disagree with Radar Man when he says "you need the stock to move to the ITM strike price or lower" which is just about the opposite of Calirich.

Let me give you an example of when I think an ITM covered call would be appropriate. Suppose you think a stock's fair value is between $50 and $55 per share, and it is currently trading in that range. If I could sell a covered call with a strike price of $50 for $6.00 (or more) I probably would. If assigned, I would sell the stock for an effective price of $56 per share, more than I think it is worth. If the option expired worthless the stock would be trading under $50 at expiration, less than I think it is worth, and I would not sell it but I would have an extra $600 in the my account from the covered call premium.

I consider the answer by pumpdatiron incorrect. He said "If you wanted to sell the stock anyway, writing a call slightly in the money would bring an extra premium. This way you've sold the stock with an added bonus." That assumes that that the stock will be sold, but if it drops in value it may not be. And if it drops in value very much, your account will have less value than if you had simply sold the stock at the time you sold the covered call.

I will mention one more thing. In the past I have seen some people recommend selling an ITM covered call because they want to keep the stock until it qualifies for the long term capital gains rate. This does not work, since selling an ITM covered call causes the start of the holding period for the stock to change.

Answer 2

Selling In The Money Calls

Answer 3

If you write an in-the-money call, you will get more premium and more downside protection than you would writing an at-the-money or out-of-the-money call. This is a conservative strategy. Of course, you give up any appreciation above the striking price of the call you wrote, and the odds are high that your stock will be called away (in fact, that's what you want to happen -- otherwise it means you may have lost money).

Answer 4

If you wanted to sell the stock anyway, writing a call slightly in the money would bring an extra premium. This way you've sold the stock with an added bonus.

Answer 5

If you like the stock and want to hold it for the long term but think that it might pullback temporary then in the covered call is a good choice. By using ITM you get maximum premium. ITM covered calls are risky because you need the stock to move to the ITM strike price or lower.

Answer 6

By writing a call options in the money, it provides two advantages.

1) Provide a higher limited downside.
2) Provide liquidity for the options allowing you to sell it easily
3) Because it is in the money already, you can command a higher premium, meaning you can sell it at a higher price relative to writing out-of-money or at-the-money.

Hope the information helps!

Answer 7

Wonderin ... listen to Zman492 ... the man KNOWS what he is talking about ...