Most covered call tutorials focus on out-of-the-money strikes — selling a call above the current stock price and hoping the stock stays below it. In-the-money covered calls work differently, and most traders either ignore them entirely or misunderstand what they're actually agreeing to when they sell one.
Here's what an ITM covered call actually is, the real tradeoff you're making, and when choosing a strike below the current price makes more sense than going OTM.
What "In the Money" Actually Means for a Covered Call
A call option is in the money when the strike price is below the current stock price. If a stock is trading at $50 and you sell the $45 strike call, that call is $5 in the money — there's $5 of intrinsic value built into the option price immediately.
The premium on an ITM covered call has two components: intrinsic value and extrinsic value (also called time value).
Intrinsic value is the difference between the stock price and the strike price — $5 in our example. This portion of the premium is not what you're earning as a seller. If the stock stays exactly where it is and your shares get called away at $45, you've effectively agreed to sell at a discount to the current price. The $5 intrinsic value is essentially giving back the gap between the current price and the strike.
Extrinsic value is what you're actually earning as a premium seller — the time value portion that decays away as expiration approaches. On a deep ITM call with little time remaining, the extrinsic value might be $0.40. On a slightly ITM call with 30 days left, it might be $1.20. The extrinsic value is the real income. The intrinsic value is just the in-the-money gap.
Understanding this distinction is what separates traders who use ITM covered calls deliberately from those who stumble into them accidentally.
The Real Tradeoff You're Making
When you sell an ITM covered call, you're not being conservative or "safe" in the way most new traders assume. You're making a specific directional bet — that the stock will stay flat or decline — and agreeing to sell your shares at a below-market price if the stock stays anywhere near current levels.
Here's the actual tradeoff:
You get more downside protection. Because the ITM call has more intrinsic value, the total premium you collect (intrinsic + extrinsic) is higher than an OTM call. If the stock drops, that larger premium offsets more of the loss than a thin OTM premium would. Your breakeven is lower.
You give up your upside immediately. Your shares are almost certain to be called away at the strike. If the stock rises from $50 to $60 and your strike is $45, you're selling at $45 and missing $15 of potential gain (minus whatever extrinsic value you collected). The stock going up is the bad scenario for an ITM covered call — you're capped below where the stock already is.
This is why calling ITM covered calls "safe" is a misframe. They're not safe — they're a different bet. You're betting the stock doesn't rise. If it does, you've sold your shares cheap and missed the move. The protection is on the downside. The cost is all your upside.
When ITM Covered Calls Actually Make Sense
There are three specific situations where selling an ITM covered call is the deliberate right choice rather than a mistake.
You're neutral to mildly bearish on the stock short-term. If you own a stock that you think is going to trade flat or drift slightly lower over the next 30 days — maybe the sector is under pressure, maybe the stock ran hard and you think it needs to consolidate — an ITM covered call lets you collect meaningful premium while you wait. If you're right and the stock stays flat or drops, you keep the premium. If you're wrong and it runs, your shares get called away at a price slightly below where it was when you sold the call. You didn't lose money. You just missed upside you didn't expect to have anyway.
IV is elevated and you want to harvest it aggressively. When implied volatility is high, the extrinsic value on ITM options can be significant — much larger than what's available on OTM options at the same expiration. In a high-IV environment, selling ITM covered calls can generate substantially more time value income than the equivalent OTM strategy, at the cost of greater certainty of assignment. If you're in a position you'd be happy exiting and IV is elevated, an ITM covered call can accelerate both the income and the exit simultaneously.
You want a defined exit at a specific price. If you've decided you want to exit a position but you're not in a hurry, selling an ITM covered call at your target exit price is a clean way to get paid while you wait for assignment. Every day that passes without assignment, you're collecting time value. When the stock is above your strike at expiration — which it almost certainly will be given the ITM strike — you exit at your price and keep all the premium collected along the way.
The One Number Most Traders Ignore: Extrinsic Value
As a covered call seller, extrinsic value is the only thing you should care about. The intrinsic value in an ITM call is not income — it's the discount you're agreeing to sell at. What you're earning is the time value portion.
Here's a concrete example. Stock XYZ is at $50. You're comparing two covered calls:
OTM call: $55 strike, 30 DTE, premium $1.80. Entirely extrinsic value — no intrinsic component since the strike is above the stock price. You collect $1.80 in time value.
ITM call: $47 strike, 30 DTE, premium $4.60. Intrinsic value: $3.00 (stock at $50, strike at $47). Extrinsic value: $1.60. You collect $1.60 in time value — actually less than the OTM call — plus $3.00 that you're essentially giving back when your shares get called away at $47 instead of $50.
In this example, the OTM call generates more extrinsic value. The ITM call generates more total premium — but most of that premium is intrinsic value, not income. The OTM call is actually the better income trade here despite the lower total premium.
The comparison flips in high-IV environments where deep ITM options carry significant extrinsic value — sometimes more than OTM options at the same expiration. Always compare extrinsic value, not total premium, when deciding between ITM and OTM covered calls.
ITM vs. OTM Covered Call: A Side-by-Side
Same stock at $50, same expiration at 30 days:
OTM covered call ($55 strike):
Premium collected: $1.80 (all extrinsic)
Breakeven: $48.20
Max gain: $6.80 per share (stock called away at $55 + $1.80 premium, minus $50 purchase price)
Scenario if stock rises to $60: Called away at $55. Missed $5 above the strike.
Scenario if stock drops to $45: Down $3.20 per share ($5 loss on stock, $1.80 premium offset)
ITM covered call ($47 strike):
Premium collected: $4.60 ($3.00 intrinsic + $1.60 extrinsic)
Breakeven: $45.40
Max gain: $1.60 per share (called away at $47 + $4.60 premium, minus $50 purchase price = $1.60 net)
Scenario if stock rises to $60: Called away at $47. Missed $13 above the strike.
Scenario if stock drops to $45: Down $0.40 per share ($5 loss on stock, $4.60 premium offset)
The ITM call gives you more downside protection and a lower breakeven. The OTM call gives you more upside participation and more extrinsic value income. The right choice depends entirely on your view of the stock and your income objective.
How to Find ITM Covered Calls Worth Selling
The key filter for ITM covered calls is extrinsic value — you want strikes where the time value is actually meaningful, not just the total premium inflated by intrinsic value. You also want elevated IV rank (so the extrinsic value is fat relative to history) and a clear earnings calendar (no announcements before expiration).
Finding the right underlying for an ITM covered call starts with the same research as any covered call — IV rank, earnings calendar, and probability data. StrikeScan scans 60,000+ live contracts every 15 minutes and surfaces covered call candidates with probability data, IV rank, and earnings flags built in. Once you've identified a ticker worth running a covered call on, you can evaluate the ITM strikes directly in your broker's options chain. 30 days free at StrikeScan.com.
The Bottom Line
ITM covered calls are not a conservative strategy disguised as income. They're a deliberate neutral-to-bearish income trade that offers more downside protection at the cost of immediate upside capping and near-certain assignment.
They make sense when you're neutral on a stock short-term, when you want to exit a position while collecting premium along the way, or when high IV makes the extrinsic value on ITM strikes genuinely attractive relative to OTM alternatives.
The key number to compare is always extrinsic value — not total premium. Strip out the intrinsic component and look at what you're actually earning as time value. That comparison will tell you whether the ITM strike is worth the certainty of assignment or whether the OTM alternative generates better income for the risk you're taking on.
Disclosure: I am the founder of StrikeScan, the platform referenced in this article. This is not financial advice.