In the Money Covered Call Strategy | Benefits and Examples


Selling in the money covered calls can be an excellent income generating strategy for those living off investments. 

An in the money covered call strategy involves selling a call option with a strike price lower than the cost of the underlying stock. This strategy is commonly used when the call writer expects the stock price to decrease, or to increase the probability of the option being exercised.    

After writing covered calls over the past 15 years, I have found that there are times when an in the money covered call strategy works better than an at the money or out of the money covered call strategy.   

And after investing in stocks for almost 40 years, I’ve learned the importance of addressing risk management before even considering any investment, so let’s do that first.  

Then let’s look at how an in the money covered call strategy works and a specific in the money covered call strategy with the three potential profit or loss outcomes based on the underlying stock price at the option the expiration date. 


In the Money Covered Call Risks

Most investors just assume selling covered calls is risky since it involves options.

The reality is that all covered call strategies are subject to overall stock market risk, as well as stock specific risk. This is why I often write that selling covered calls can be an ideal income stream for investors who already have stock market risk in their portfolio anyway.

Contrary to popular belief, selling covered calls slightly reduces stock risk over owning stocks outright without a covered call strategy sold against them. This is because the call option income offsets the cost of the stock the minute the call option income hits your brokerage account. And this happens immediately after the call option is sold against the stock.   

In the money covered calls, however, tend to be the least risky of the three covered call strategies, and here’s why: In the money strategies offset stock cost more than other covered call strategies because the covered call writer gets the highest premium when selling in the money options, as explained ahead.

And these higher premiums lower the biggest risk of using covered call strategies: risk of the underlying stock dropping due to either the overall market or stock specific bad news. 

Risk Management Tip♦  All investors will want to confirm that investing in stocks is within their own acceptable risk level before even considering using any covered call strategies.

It’s easy for investors to get lured into writing covered calls because the income is so high relative to dividends. The income generated from selling covered calls usually ranges at least two to twenty times that of typical dividend income!

That’s not to imply covered call strategies are bad.

Wealth Building Tip♦ All investments are bad if they take an investor outside of acceptable risk while too little risk can hinder investment returns.

Now that risk from covered call strategies has been addressed, and how in the money covered calls can be the least risky strategy, lets’ see how an in the money covered call strategy, specifically, works, as opposed to other covered call strategies.

How Does an In the Money Covered Call Strategy Work?

Let’s say that Ali buys 100 shares of stock in Income Streams, Inc, for $100. This will be the underlying stock against which she sells call options for some extra income.

It’s a quality stock, but based on the stock’s chart, she thinks the stock has a good probability of dropping in value over the short term because it’s at the top of its’ recent trading range.

With this in mind, she decides to sell a call option with a $99 strike for $2 instead of a call option with a $100 strike for $1.50 agsint her Income Streams, Inc. shares.

Here’s how Ali looks at it.

If the stock drops to $97 by the option expiration date, the option won’t be exercised. She will keep the stock, with the plan to sell another call option soon at an opportune time, anticipating the stock will move back toward the high end of its’ trading range within a week or two based on the stock’s recent trends.

Ali already made a nice $2 per contract for the call option she sold.

Ali’s example gives you a basic and broad idea of why a covered call seller may choose an in the money covered call strategy. This post goes into more detail ahead, outlining the income, three different outcomes, and potential actions at option expiration for a specific in the money covered call strategy so keep reading.


When to Use an In the Money Covered Call Strategy 

As you saw in the example above, an in the money covered call strategy is commonly used when:

  1. The stock price is expected to decrease near term
  2. The call seller wants the option to be exercised

Below are several important factors to consider, however, before using an in the money covered call strategy   


Higher Income from In the Money Covered Calls 

The deeper in the money the strike price is to the market price of the underlying security, the higher the premium from a covered call strategy. Again, this means that in the money covered call strategies generate higher income than out of the money covered call strategies.  

If increasing stock income by selling covered calls is the primary objective, it’s worth considering in the money covered call strategies.

And who doesn’t want higher income for the same amount of capital at risk? There is trade off for this income, however, and more to consider as explained below.  


In the Money Covered Calls Get Exercised 

You’ll want to decide if you prefer that your covered calls get exercised or not. While it’s not completely under your control whether a call option gets exercised, the covered call strategy used will definitely affect the probability that positions will get called at option expiration.   

The deeper in the money the call option is, the greater the probability it will get exercised.

Rolling covered calls that you don’t want to be exercised is a common strategy that can work well, too. 


Manage Fewer In the Money Covered Calls 

If you hate managing covered calls, in the money strategies may be best for you since more in the money covered call positions get exercised than at the money or out of the money covered call strategies 

This is simply because the strike price is lower with an in the money covered call strategy than it is with an at the money or out of the money covered call strategy.  


New Covered Calls Positions

If you enjoy researching stocks and easily find new ideas for covered calls, you may want all your covered call positions to get exercised so you can enter new positions more often.

On the other hand, if you struggle to find new covered call positions, out of the money call options may be more convenient since they’re less likely to be exercised than in the money covered calls. This allows you to sell call options repeatedly against the same stock position, thereby reducing the need to find additional suitable stocks.


Less Investment Capital for In the Money Covered Calls

One last advantage for in the money covered call strategies is that having all your covered calls exercised each month provides capital for fresh positions without having to allocate more capital to stocks designated for covered calls. After a covered call is exercised, the capital used to own the stock is available for new covered call positions. 

Read my related post on the cash allocation in a portfolio 


My In the Money Covered Call Experience

My experience has been that usually the very first covered call on a new position has the best return over ongoing, managed positions, giving me a bias toward at the money or in the money covered calls. This is because the entire position can be entered into based on the optimal income initially.  Likewise, new covered call trades each month tend to generate more income, easier

On the other hand, managing covered calls is probably a little less work than finding new covered calls to sell every month. This is offset, however, by the reality that managing unexercised covered calls doesn’t generate as much income as new monthly trades. 

Income Stream Tip♦  The same stocks can be used for covered call strategies repeatedly, sometimes around dividends or earnings news.


Covered Call Selling Frequency

Note that many covered call writers prefer to open new positions every 4 to 6 weeks for minimal effort with good income, but there are many other covered call time frames, including weekly options.  

Remember that a core principle at Retire Certain is to decide how much time you want to spend on your income streams first, and then implement income generating and wealth building strategies from your lifestyle decision so you can live how you want  

Read my related post How to Create a Wealth Plan that explains this more.  

Below are the other factors for when to use an in the money covered call strategy, so keep reading.  


Underlying Stock Is Headed Down 

If you think a stock is headed down, as was the case in the example above with Ali’s stock, selling an in the money call option can be the best strategy.  

Like Ali, you may have checked a stock chart and seen that the stock is at the high end of the recent trading range. Note that if you’re new to stock charts, while technical analysis can seem daunting, very basic technical analysis can be an incredibly valuable tool for evaluating the best covered call strategies.  

Alternatively, you may have an insight into an upcoming event, such as company earnings or a new competitive product, that will likely cause the stock to drop, ideally on a temporary basis only.   

In this case, an in the money covered call strategy may work the best as you’ll see in the example later.   


The Stock Market Is Declining 

The worse thing for covered call writing is experiencing bear markets so let’s see how bear markets affect in the money covered call strategies when compared to other covered call strategies. Again, it’s important to first note that investors who own stocks without covered calls, especially stocks that don’t pay dividends, also suffer during bear markets. 

Also remember that bear markets have, in hindsight, usually been excellent opportunities for covered call strategies once a sideways or bull market resumes.  And, of course, some stocks do well during bear markets. 

If the overall market is trending down, however, it usually makes more sense to sell in the money covered calls than out of the money covered calls as explained below, IF you choose to stay invested in stocks despite the decline.  

Read my related posts: Are Covered Calls a Good Idea? and Stocks That Went Up in 2008 or What Goes Up When Stocks Go Down? 


Out of the Money Vs In the Money Covered Calls in Bear Markets 

While in the money covered call strategies may do best in declining stock markets, out of the money covered calls aren’t ideal either on declining stocks or etf’s. Let’s compare how each perform in declining stock markets.

Remember, the further away the strike price is above the current stock price, the less income generated since the option premium (price) gets lower as it moves further up and away from the stock price. This occurs with out of the money covered call strategies but not with in the money covered call strategies.  

Second, if you’re selling out of the money covered calls in down trending markets, those out of the money covered calls are unlikely to get exercised.  

When this happens, unfortunately, all your covered call capital gets tied up in those covered call stocks that didn’t get exercised! 

And since the market is declining, it is harder to sell call options near your stock purchase price since the option prices have declined with the stock price.

Selling call options below a stock’s cost can result in selling the underlying stocks at a loss. Investment capital allocated to covered call selling can get completely tied up with little if any income from stocks during bear markets.

Since in the money covered calls are more likely to get exercised as stocks drop, they are generally a better choice than in the money covered call strategies in declining markets.

Income Stream Tip♦  Selling call options on high dividend stocks can make sense for investors who always want at least a little income from stocks.    

However, for retirees and others living off investments who count on covered calls for income, bear markets can present a real challenge. This exact discovery led us to create diversified multiple income streams over the past 15 years from real estate, stocks, and online business.   


The best place to start is with my Ultimate Wealth Plan. You can get it here now.



Fortunately, there are some advanced covered call management strategies that can be used during stock market downturns. And, of course, covered calls can be sold on etf’s of other asset classes that often move counter to stocks, such as bonds, or sometimes gold. (Read my related post What Goes Up When Stocks Go Down?)

Nevertheless, covered call strategies work best and are the easiest to implement in sideways or upwardly trending markets.

Read my related post Problems with Covered Calls 


Income from Covered Calls Vs Capital Gains 

Based on your overall wealth plan, you may find that you want income more than capital gains. An in the money covered call strategy usually generates higher income while reducing or eliminating capital gains.  

This is simply because when an in the money covered call is exercised, the option seller has to sell the stock at a lower (strike) price with an in the money covered call than an out of the money covered call.  

Now that you’ve seen the factors to consider before choosing an in the money covered call strategy specifically, let’s look at the math with an example.


In the Money Covered Call Strategy Pros and Cons 

In the Money Covered Call Pros In the Money Covered Call Cons
Higher Income from Call Options No Capital Gains
More Likely to Be Exercised Time to Find New Positions
More Defensive Strategy May Have to Sell Stock at Loss
Fewer Positions to Manage  
Higher Investment Capital Turnover  
Lower Stock Basis for Risk Management  


In the Money Covered Call Example    

Here is an example of an in the money covered call strategy.   

Alex bought 600 shares of Retire Corp for $18.50 a share on May 16. Hwanted to generate some income from the stock, so she sold 6 June call options with an $18 strike price for $1.40 each 

This gives the call purchaser the right to buy the stock from Alex at $18 on the third Friday of June (option expiration), or June 15 in that particular year 

It’s important to note that Alex immediately got $800 deposited into her brokerage account for the sale of the options which she gets to keep regardless of what the stock price does. 

Income Stream Tip♦  To understand why covered calls can be an excellent income generating strategy for those living off investments, compare covered call income to typical stock dividend income.  

Covered Call Income Generated from Retire Corp.  

The $800 covered call income is from the following calculation: 

$1.40 per option contract x 6 contracts x 100 = $840  

♣  It’s super important to remember that when you sell in the money covered calls, you know that you may have to sell the stock at a loss unless you roll covered calls you don’t want exercised

If so, this loss will offset the income generated from selling the call option as explained more ahead.   


How Many Stocks Does One Option Contract Represent? 

In this example, I multiplied the option equation above by 100 because 1 option contract equals 100 shares of stock.  

So, by owning 600 shares of Retire Corp, Alex was able to sell the 6 option contracts.  

Wealth Tip♦ Here’s what’s cool: covered call writers get to multiply the option premium by 100 to get the amount of income received before commissions.


Costs of Selling Covered Calls

Taxes and brokerage commissions are excluded from the calculations in this post. They should be considered based on your own situation and commission structure.   

The good thing for covered call investors is that stock and option commissions have gotten very cheap over the past two decades due to competition, especially with the ability to buy and sell securities online.  

Additionally, many investors sell covered calls in IRA’s to eliminate, defer or reduce taxes.   

Now back to Alex and her covered call position on Retire Corp.

Unless Alex buys back the call option, what happens on options expiration depends on the price of the stock on June 15the third Friday in June that year, so let’s look at that next.


What Happens at Options Expiration for in the Money Covered Calls?  

One of 3 things could happen at option expiration as outlined below.  


1. Stock Closes at the Strike Price on Options Expiration 

In this scenario, Retire Corp closed at exactly $18, or at the money. This is not common but stick with me because it’s important because it makes the math on in the money covered call strategies easy to understand.   

In this case, the option buyer may or may not “exercise” the call option (buy the shares of Retire Corp) since the option strike price is the same as the market price on option expiration. Either way, Alex kept the $800 from the option sale. 

Assume the option buyer did not exercise the option by buying the stock. At this point, Alex has several options you can see below. (Pardon the irresistible pun.) 

Note that this turned out to be a very profitable covered call trade for Alex with a stock that decreased in value. 

Option 1. Sell Another Call Option 

Alex can sell another call option for the next month against her shares in Retire Corp. Note that since the stock price has dropped from her purchase price of $18.50, the income generated will not be as good as the prior month since the stock price (and related option) is lower. 

Remember, the prior month, the stock was at $18.50. This was the market price when she sold an in the money call option for $1.40 with an $18 strike. This is one reason so much income was generated from this particular covered call; it was a deep in the money covered call strategy 

This means if Alex sells another covered call it will probably not be in the money since doing so would generate too much of a stock loss.

Remember, the higher income trade off with in the money covered call strategies is that the stock can be called at a loss.  

This is why doing the option expiration math for all 3 potential outcomes is important before making any covered call investments.

Even after evaluating the potential outcomes, remember that, while charts and information can be used to guide us, no one can know for certain the stock’s price at option expiration since it’s in the future. 

Read my related post Does Living Off Covered Calls Really Work? for more on covered call risk. 


Option 2. Sell a Call Option After Stock Rises 

Instead of selling another call option right after option expiration, Alex can watch the stock chart with the plan to sell a call option near the top of the current trading range to get a higher option premium.  Of course, there is no way to know this with certainty but the stock chart can provide probabilities. 


Option 3. Sell a Call Option with More Time Value 

Alex can sell a call option for two or more months out, increasing the option premium by increasing the time value. Rolling out covered calls is a common practice. 

Income Stream Tip♦  Note that decay of time value is a huge advantage for option sellers vs option buyers that naturally happens with covered call writing.  


Option 4. Sell the Stock 

Alex can simply sell the stock and close the position.  

In this case, Alex would have made $800 from selling the call options. This would be offset by a loss on the stock of $300 ($.50 per share assuming she sold it at $18 on Monday morning following option expiration) leaving her with a profit of $500


2. Covered Call Expires In the Money  

In this next possible outcome, assume Retire Corp closes below $18, or deep in the moneyIclosed at $17.16 

The option buyer didn’t exercise the option since the market price of the stock on expiration day is below the strike priceThe option buyer could simply buy the stock for less than the strike price of $18 so there would have been no reason to exercise the option. 

It was a little bit of a bummer for Alex because the stock had dropped in value since it was bought at $18.50. But the good thing is that Alex gets to keep the $ 1.40 for selling the option, which reduces her Retire Corp position cost per share cost to $17.10.  

She would be close to breaking even on the overall position if she sold her stock at option expiration. 

Alex could still use any of the four options available from above but the outcome will be less favorable since the stock price dropped more before the option expiration date.

Let’s look at the third possible outcome at option expiration with her Retire Corp in the money covered call strategy.


3. Stock Closes Out of the Money on Option Expiration  

Assume Retire Corp closed at $19.00, or out of the money. The option buyer would have logically exercised his right to BUY the shares at the strike price of $18 since the stock price was $1 more than the strike price at option expiration 

In this case, Alex would have to sell Retire Corp. below the market price of $19.50 but she is okay with that since she did the math for all 3 possible option expiration outcomes before choosing the best covered call strategy given her evaluation 

In this case, Alex would have made $560 on the overall position as follows: 

Loss from Retire Corp Stock

Sales Price of Stock          $18.00 

Cost of Retire Corp          $18.50 

Loss on Retire Corp           $(.50)

Income from Covered Call Investment 

Income from Sale of Option   $1.40

Less Loss on Retire Corp       –    .50

Net Profit per Share                   $.90 

Number of Shares                       600 

Total Profit                           $560 

As you can see, all the profit from this covered call investment came from the sale of the option premium, as is often the case with in the money covered call strategies.

In My Experience♦ I usually enter in the money covered call strategies, however, with the expectation that the stock will temporarily decrease in value. Otherwise, I’d sell an out of the money covered call.   

Keep in mind this is income from one month’s profit from just one covered call position. You can see why covered calls can be a great income generator for stock investors who are already exposed to stock market risk anyway.  

♦Wealth Building Mindset♦ Always evaluate potential best and worst case investment outcomes, then accept and learn from what occurs.

Annualized Covered Call Return

Alex’s annualized return on this in the money covered call strategy would be:

Option Net Profit/Cost of Retire Corp$ .90/18.50 = .049 x 12=59% annualized 

This isn’t to say that this same return on investment could be made if this investment were made repeatedly throughout the year. However, in order to compare a monthly or six week return to an annual return, such as dividend income of 3% a year, it helps to calculate covered call returns annualized.


Lowering Stock Risk with In the Money Covered Calls 

Stop losses can be set to significantly lower stock risk when selling covered calls. This works especially well with in the money covered calls since the overall position cost is lower due to the high option premium.   

Remember, a lower overall stock cost lowers risk. This lower basis (adjusted stock price) can also serve as a good place for a stop loss to lower investment risk from stocks. I like to assess this from a stock chart, as well as fundamentals such as earnings and dividends, while also factoring in the risk I am willing to accept.  

During times of high volatility, for example, I have structured covered calls with a very low risk loss potential of about 1% while using stop losses and selling covered calls against a diversified portfolio of etfs for income. 

Read my related post to see how a stock market crash will affect you 


Summary for In the Money Covered Call Strategy 

As you may have guessed, not all in the money covered calls investments are profitable, but many are, and they can be an excellent income source.

Before deciding whether to use an out of the money, at the money, or an in the money covered call strategy, consider the above factors, overall stock market direction and your own financial goals for building wealth or income. 


The best place to start is with my Ultimate Wealth Plan. You can get it here now.

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DISCLAIMER: Nothing in this post is meant to be taken as personal financial advice. Hire a financial professional if you think you need one. 



The information on this website is for education only and is not to be construed as personal financial advice.