Home › Guides › Options: decisions

OTM vs ITM covered calls: cushion, or upside?

An out-of-the-money call collects less but lets the shares rise. An in-the-money call collects a lot, but most of it is the stock's own value handed back. Here's the whole picture in one table.

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

The short answer

An OTM (out-of-the-money) covered call has a strike above the stock price. You collect a small premium and keep room for the shares to rise. An ITM (in-the-money) covered call has a strike below the stock price. You collect a big premium, but you've already agreed to sell below today's price, so almost none of it is real gain.

OTM is the usual choice in the wheel strategy. ITM is a tool for when you want a cushion against a drop more than you want upside.

What the premium is made of

A call's premium has two parts.

• Intrinsic value: how far the stock is above the strike. An ITM $45 call on a $50 stock has $5 of it. An OTM call has none.
• Extrinsic value: the time and uncertainty part. This is the only part a seller truly earns.

An ITM call that sells for $6.00 might be $5.00 intrinsic and $1.00 extrinsic. The $5.00 isn't a gift; it's your own shares' value, paid to you early. See intrinsic vs extrinsic value for sellers.

Side by side

A worked example (an illustration, not a trade idea)

You own 100 shares of made-up stock XYZ at $50.

• OTM: sell a 30-day $55 call for $1.00.
• ITM: sell a 30-day $45 call for $6.00 ($5 intrinsic + $1 extrinsic).

Read it row by row.

• At $35 and $40, both lose. The ITM call loses $500 less because its cushion is bigger. Neither protects you from a real fall.
• At $44, the ITM call breaks even. The OTM seller is down $500.
• At $55 and above, the OTM call makes $600 and the ITM call makes $100. The ITM seller gave up $500 of upside the day they sold.

The ITM call's max gain is only its extrinsic value: $1.00. You collected $6.00, but $5.00 of it was your own stock.

When an ITM call fits

• You want to exit the shares anyway and will take a bit of extra premium to do it slowly. See covered call or sell the shares now.
• You expect the stock to drift lower and want the cushion more than the upside.
• The stock has had a big run and you'd be happy locking in most of it.

Two warnings. ITM calls are more likely to be assigned early, especially before an Ex-dividend date. And a deep ITM call can affect how a dividend is taxed in the US; ask a tax professional.

When an OTM call fits

• You'd like to keep the shares unless they rise a fair bit.
• You want the premium to be real gain, not your own share value.
• You're running the wheel: collect, wait, and let a strong move take the shares at a price you chose.

The strike choice within OTM matters too. A $52 call collects more than a $55 call and caps you sooner. See covered call strike selection.

Pick this if, pick that if

Pick OTM if:

• You still want the stock to rise.
• A $1 cushion is fine because you'd hold through a drop anyway.
• Being called away at a price above today's would feel like a win.

Pick ITM if:

• You want cushion more than upside, and you'd sell at the strike today.
• You're exiting the shares and want to be paid a little to do it.
• You understand that most of the "premium" is your own stock coming back to you.

Pick neither if:

• You'd be upset to sell at any strike. A covered call is a promise to sell.
• The stock is falling hard. No call strike fixes a stock that keeps dropping. See covered call on a falling knife.

Questions