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In-the-money covered calls: more cushion, less upside, and when they make sense

An in-the-money covered call uses a strike below the current stock price. You collect a big premium, most of it the stock's own value, and give up nearly all upside. It makes sense in one honest case: when you'd sell the shares at that strike anyway. Here's the arithmetic, including the case where the cushion isn't enough.

Options guide · 8-minute read · Updated 2026-10-26

What "in the money" means for a call you sell

A call is in the money when the stock is already above the strike. If XYZ is $50 and you sell the $45 call, that call is $5 in the money.

The premium you collect has two parts. The $5 of real value (Intrinsic value), which is just the stock's own price handed back to you, and a smaller slice of Time value, which is the only part you're truly "paid". Our guide on how options are priced splits them.

In Moneyness terms, you've chosen the deep end. See out-of-the-money covered calls for the usual shallow end.

What you get and what you give up

You get a bigger cushion. The $5 of intrinsic value plus the time value comes to you today. If the stock falls, that's a deeper buffer than any out-of-the-money call offers.

You give up almost all upside. Your shares will almost certainly be called away at $45, a price below today's. Any rise in the stock is the buyer's.

Your max gain shrinks to the time value. If called away at $45 after collecting $6.00, you get $45 + $6 = $51 for shares worth $50 today. One dollar. That's the whole upside.

A worked example where the cushion runs out (an illustration, not a trade idea)

You own 100 shares of a made-up stock, XYZ, bought at $50. It's at $50 now. You sell a 35-day $45 call for $6.00: $5.00 intrinsic, $1.00 time value. You collect $600.

Your break-even on the shares drops to $44. Your max result is $100, the time value. Here's every outcome:

Now the story. Two weeks in, XYZ reports bad news and drops to $41. The call is now worth about $0.20. You could buy it back for $20, having kept $580. But the shares are down $900. You're at −$320 on paper, and you still own 100 shares of a stock that just broke.

You hold. By expiry XYZ is $38. The call expires. Your account:

The $6.00 premium looked like real protection on day one. It covered half a $12 fall. The other half is yours, and the stock still has to find a floor. Meanwhile, if XYZ had instead rallied to $60, you'd have made $100.

The one honest use: an exit in disguise

An in-the-money call makes sense when you'd sell the shares at the strike today.

Say you've decided XYZ at $50 is done and you'd happily take $45 for it. Selling the $45 call for $6.00 means:

• If the stock stays above $45, you sell at $45 and keep $6.00, so $51 in total. Better than selling at $50 now.
• If it drops below $45, you still own it, and you've been paid $6.00 while it fell.

That's an exit that pays you a little to wait, with the chance it's never needed. The cost is that the stock might rise, and you've capped yourself below where it is today. If that's fine, it's an honest trade. If you'd be upset, it isn't.

Compare it with just selling: covered call or just sell the stock.

When it doesn't make sense

• To "lock in" a gain on a stock you still like. You'll be called away. If you want to keep it, don't cap it below the price.
• Because the premium is huge. Most of it is the stock's own value coming back to you. Count only the time value as your pay.
• On shares bought well above today's price. If you paid $55, the stock is $50 and you sell the $45 call for $6.00, assignment nets $45 + $6 = $51 a share. That's a $4 loss per share, locked in. The Cost basis question comes first.
• For taxes. In the US, a deep in-the-money call can pause your holding period and affect dividend treatment. See covered call taxes.

Where it fits in the wheel

In the wheel strategy, an in-the-money call is the "I'm ready to leave this stock" setting. It's the last turn of a cycle, not the normal one. The at-the-money version sits in the middle; see at-the-money covered calls.

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