Let's be honest. Most people getting into options for the first time are looking for that "lottery ticket" moment. They want to buy a cheap out-of-the-money call, pray for a 20% jump in the stock, and wake up to a 500% gain. It's exciting. It's also how most retail accounts get blown out. But then there's the other side of the coin—the strategy that feels almost counter-intuitive to the gambling crowd. I'm talking about selling in the money calls.
It sounds weird at first. Why would you sell an option that already has value? If the stock is at $100, and you sell a $90 call, you’re basically starting the trade underwater on the intrinsic side. But here’s the thing: professional desks and institutional income funds use this specific mechanic to hedge, generate immediate cash flow, and lower their "cost basis" to levels that make the average "buy and hold" investor look like they’re playing a different game entirely.
What's actually happening when you sell in the money?
When you write a call, you're giving someone else the right to buy your shares at a specific price (the strike price). If you're selling in the money calls, you are picking a strike price that is lower than the current market price of the stock.
Take a look at Apple (AAPL) for a second. If it's trading at $220, and you decide to sell a $210 call expiring in a month, that option is "in the money" by $10. You aren't just collecting "hope" (extrinsic value); you're collecting $10 of "real" value plus a bit of time premium. You get paid upfront. Big time.
The immediate result? Your downside protection is huge. Because you collected so much "premium" (the price of the option), the stock can actually drop quite a bit before you start losing money on the overall position. This is the bedrock of what's often called a "deep-in-the-money covered call" strategy. It’s less about chasing moons and more about building a fortress around your capital.
The intrinsic vs. extrinsic value trap
Most traders get hung up on the "time decay" or Theta. They think they only make money if the stock stays flat or goes up. That’s a surface-level take.
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When you engage in selling in the money calls, the premium you receive is split into two buckets. First, there's the intrinsic value. This is the difference between the stock price and the strike. If the stock is $50 and the strike is $45, the intrinsic value is $5. Then, there's the extrinsic value—the "extra" juice based on time and volatility.
Here is the secret: When you sell ITM, you are essentially trading away your upside potential in exchange for a massive buffer. You're saying, "I'm okay with my stock being called away at $45, as long as I get paid $7 for the privilege today." If you get that $7, your "effective" sale price is $52 ($45 strike + $7 premium). If the stock was at $50 when you started, you just locked in a $2 profit even if the stock doesn't move an inch. Heck, the stock could drop to $46, and you’d still walk away with that same $2 profit (minus commissions).
It's a defensive play. It's boring. It's also incredibly effective in choppy or bearish markets where everyone else is losing their shirts.
Why the "covered call" crowd thinks you're crazy
If you hang out on Reddit or Twitter (X), you'll hear people preaching about selling "out of the money" (OTM) calls. They want to keep their shares and make a little extra on the side. They’re terrified of having their shares "called away."
But honestly? Selling OTM calls is picking up pennies in front of a steamroller.
If the stock tanks, an OTM call provides almost zero protection. If the stock is at $100 and you sell a $110 call for $1.00, and the stock drops to $80, you’re down $19 per share. Ouch. If you had been selling in the money calls—say a $90 strike for $12—you’d only be down $8.
The tradeoff is simple: You give up the "dream" of the stock hitting $150 to ensure you don't get destroyed if it hits $80. Real wealth isn't made by 1000% gains once a year; it’s made by not losing 50% of your account when the market turns sour.
The math of the "Effective Buy-In"
Let's look at a real-world scenario using a high-volatility stock like Nvidia (NVDA). High volatility means the premiums are fat.
Imagine NVDA is at $120. You could buy 100 shares for $12,000.
Or, you could buy 100 shares and immediately sell a $110 call expiring in 45 days.
Maybe that call is trading for $15.00 ($1,500 total).
- Cash Outlay: $12,000 - $1,500 = $10,500.
- Your Break-even: $105 per share.
- Maximum Profit: If the stock stays above $110, your shares are called away at $110. You spent $105 (net), so you make $5 per share.
That’s a 4.7% return in 45 days. Annualized, that’s over 35%. All while having a cushion that protects you against a 12.5% drop in the stock price. Show me a savings account or a "safe" dividend stock that does that. You won't find one.
The psychological hurdle of "Limited Upside"
Human beings are hardwired to hate "missing out." This is the biggest obstacle to successfully selling in the money calls.
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You will sell the call. The stock will rocket up 20%. You will look at your screen and see that you "only" made 4%, while the guy who just bought the stock made 20%. You’ll feel like an idiot.
Don't.
Professional trading is about probability, not FOMO. The person who made 20% also took 100% of the downside risk. By selling that ITM call, you took a "defined outcome" trade. You knew exactly how much you would make before you even clicked "confirm." There is a certain peace of mind that comes with knowing that even if the market has a bad week, you're likely still going to hit your target profit.
When to avoid this strategy
It's not all sunshine and guaranteed checks. There are moments when selling in the money calls is a terrible idea.
- Before a massive catalyst: If a company is about to report earnings and you expect a blow-out quarter, don't cap your gains. ITM calls are for steady states or defensive postures.
- Low Volatility environments: If the "VIX" is in the basement and options are cheap, you aren't getting paid enough to justify the capped upside. You need "fat" premiums to make the math work.
- Dividend Capture: If you're selling calls on a stock right before its ex-dividend date, be careful. If the call is deep ITM, the buyer will likely "exercise early" to steal your dividend. You’ll be left with cash and no dividend check.
The Tax Man Cometh
We have to talk about taxes. Selling calls—especially ITM ones—can mess with your "holding period" for capital gains.
If you've held a stock for 11 months and you're hoping for a long-term capital gains rate (which is much lower than ordinary income), selling a "deep" in-the-money call can actually reset your clock or suspend it. The IRS views deep ITM calls as "qualified" or "unqualified" covered calls based on how far in the money they are.
Generally, if you sell a call that is more than one strike price in the money (and it meets certain mathematical criteria regarding the stock price), it might be considered "unqualified." This means you won't get that sweet long-term tax rate. Always check with a tax pro who actually knows what a "Straddle" or "Section 1092" is before you go all-in on this in a taxable brokerage account.
Institutional usage: Why the big boys love it
Ever wonder how "Income Funds" manage to pay out 10% or 12% yields even when the market is flat? They aren't magical. They are often just systematic sellers of ITM or ATM (At The Money) calls.
Think about it from the perspective of a pension fund. They don't need to double their money in a year. They need to hit 7% or 8% to meet their obligations to retirees. By selling in the money calls, they can manufacture that 7% return with a much lower "standard deviation" (volatility) than just holding the S&P 500. It turns the stock market into a high-yield replacement.
Dealing with Assignment
Eventually, your shares will be called away. It's part of the job.
Many retail traders freak out when they see "Assignment Notice" in their email. They feel like they lost their "position."
Actually, assignment is the goal. It means your trade reached its maximum profit. Once the shares are gone, you have the cash back in your account, plus the profit. You are now "liquid." You can go right back out and do it again—perhaps on the same stock if the price is right, or on a different sector that's looking juicy.
This is the "Wheel Strategy" adjacent thinking. Sell a put to get in, sell a call to get out. But by selling in the money calls, you're just accelerating the "get out" part while demanding a higher "insurance premium" from the buyer.
Practical Steps to Get Started
If you're looking to actually implement this, don't just go clicking buttons. There is a method to the madness.
- Pick a "Safe" Underlying: Don't do this with penny stocks or bankrupt biotech firms. Pick companies with real earnings, like Microsoft, Amazon, or even broad ETFs like the SPY or QQQ. You want liquidity. You want tight "bid-ask" spreads so you don't lose money just entering the trade.
- Check the Delta: Look at the Delta of the call you’re selling. For an ITM call, the Delta will be higher than 0.50 (usually 0.60 to 0.80). A Delta of 0.70 roughly means the market thinks there’s a 70% chance the option ends up in the money. That’s your "probability of success" for the maximum profit scenario.
- Calculate the Static Return: Use a calculator. (Stock Price - Strike Price) - (Market Price - Premium). If that number is positive, you’re making money even if the stock stays flat.
- Watch the Calendar: Stick to "monthly" or "weekly" expirations. The "sweet spot" for time decay (Theta) usually starts accelerating around 45 days before expiration. Selling a call a year out is just tying up your capital for way too long.
- Set an Exit Plan: If the stock price drops below your break-even (your net cost), you need to decide if you’re going to "roll" the option (buy it back and sell another one further out) or just take the loss and move on.
The Bottom Line on Selling In The Money Calls
At the end of the day, selling in the money calls is a strategy for the disciplined. It’s for the person who has realized that the market is a giant machine designed to transfer money from the impatient to the patient.
You aren't trying to predict the next AI revolution or the next crypto moon. You’re acting like an insurance company. You’re providing a service (liquidity and upside potential) to someone else, and you're charging them a hefty fee for it.
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The protection you get is real. The cash flow is immediate. And while it might not make for the most exciting "gains" post on social media, it's one of the most reliable ways to actually grow an account over time without having a heart attack every time the Fed opens its mouth.
Start small. Maybe try it with one "lot" (100 shares) of a stable stock you already own. Watch how the price moves. Watch how the premium decays. Once you see the "net cost" of your position drop below the market price, you'll understand why the pros have been doing this for decades while the rookies are still chasing "lotto" calls.
Next Steps for Implementation:
- Review your current holdings: Identify stocks where you have at least 100 shares and wouldn't mind selling if the price was right.
- Analyze the "Moneyness": Look at the options chain for those stocks. Compare the premium of a strike that is 5% ITM versus one that is "At The Money."
- Run the "Downside Protection" math: Subtract the premium from your current stock price to find your new break-even point.
- Verify the Tax Status: If the account is a 401k or IRA, you don't have to worry about the IRS "qualified" rules. If it's a standard brokerage account, consult your CPA before selling deep ITM.