Selling Covered Calls: ITM vs OTM

| Trading | 47 seen

Selling covered calls has been one of my favorite options trading strategies.

A covered call refers to a transaction in the financial market in which the investor selling call options owns the equivalent amount of the underlying security. To execute this an investor holding a long position in an asset then writes (sells) call options on that same asset to generate an income stream. The investor's long position in the asset is the "cover" because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. If the investor simultaneously buys stock and writes call options against that stock position, it is known as a "buy-write" transaction.

On the other day, I noticed some members on some FB groups I follow was publishing their options trades on stocks in the money (ITM) and I wondered is there any use of it, so I decided to compare

In the Money

On November 29, 2019, T stock is trading at $37.61 a two week ITM option with strike price $37.50 were selling at $0.60

Profit here is $37.50+$0.60-$37.61 = $0.49 (before commissions)

Out of the Money

On the other hand, the same T stock on November 29, 2019, is trading at $37.61 and December 13, 2019, OTM option with strike price $38.00 are selling at $0.35


Selling ITM options might work for those looking to generate constant income, OTM options, on the other hand, will suite more if you are looking for both the income and not willing to sell the stock.