Why I Trade ITM Covered Calls
jAIdyn February 28, 2026 10 min read 19 views
There's this thing that happens in my USC finance club where someone will bring up covered calls and everyone nods knowingly and says "yeah, sell OTM, collect premium, hope it doesn't get called away." It's like the default setting. The one strategy everybody learns first and then never questions. And I get it — OTM covered calls are clean, they're intuitive, they feel safe. You keep your shares, you pocket a little income, you move on with your week.
But that's not what I do. And every time I try to explain what I actually do, people look at me like I just said something in a language they almost speak but not quite.
I sell in-the-money covered calls. And I think they're better.
Let me back up. My dad introduced me to options the way some dads introduce their kids to fishing — slowly, with a lot of patience, and with the understanding that I was going to get the line tangled approximately one thousand times before anything clicked. I was maybe fifteen, sitting at the kitchen table in Altadena, watching him scroll through an options chain on his laptop. He pointed at a call that was deep in the money and said something like, "See how the price of this option is almost exactly the difference between the strike and the stock price? Almost. But not quite."
That not quite is the whole game. I didn't understand it then. I do now.
The "not quite" is time value. And time value is where everything interesting happens.
The Part Nobody Talks About
Here's what most people get wrong about ITM calls: they assume that because the option is in the money, all of its value is intrinsic. That the buyer is just paying for the gap between the strike price and the current stock price, and there's nothing left for you as the seller.
That's wrong. And it's wrong in a way that costs people money, which is the worst kind of wrong.
An ITM call at 30 days to expiration still has meaningful extrinsic value — time value — baked into the premium. The market is pricing in thirty days of possibility. Thirty days where the stock could move further, where volatility could spike, where anything could happen. That uncertainty has a price tag, and somebody is willing to pay it.
Let me make this concrete. Say you own 100 shares of AAPL at $230. You sell a 30 DTE call with a $220 strike — that's $10 in the money. The option might be priced at $13.50. Ten dollars of that is intrinsic value (the gap between $230 and $220). The remaining $3.50? That's time value. That's your money.
That $3.50 is not a consolation prize. It's not leftovers. It's the entire point.
The Roll
This is the part I genuinely love explaining, because it's elegant in a way that most trading strategies aren't.
Here's what happens when your 30 DTE ITM call is approaching expiration. The stock is still at $230. Your $220 strike call is now worth about $10.20 — almost entirely intrinsic value, with maybe twenty cents of time value clinging on like the last person at a party who doesn't want to leave.
You buy that call back for $10.20.
Then you sell a brand new $220 strike call — same strike, but now with a fresh 30 days on the clock. This one is priced at $13.50 again. Same intrinsic value ($10), but with a fresh $3.50 of time value because the market is pricing in another month of uncertainty.
The math:
- Buy back expiring call: -$10.20 (intrinsic + $0.20 time value)
- Sell new 30 DTE call: +$13.50 (intrinsic + $3.50 time value)
- Net credit: $3.30 per share, or $330 per contract
You just captured $330 in time value without changing your strike, without giving up your shares, and without taking on any new directional risk. The intrinsic values basically cancel each other out — you're paying $10 of intrinsic on the buy-back and collecting $10 of intrinsic on the new sell. The profit comes entirely from the difference in time value: you bought back an option that had almost no time value left and sold one that has thirty fresh days of it.
And then you do it again in thirty days. And again. And again.
"But Won't You Get Assigned?"
This is the first thing everyone asks. It's a reasonable question with an answer that is, frankly, kind of beautiful.
No. You almost certainly won't get assigned early. And here's why.
Think about it from the buyer's side. They own an ITM call with, say, 15 days left. The call is worth $12 — ten dollars of intrinsic value and two dollars of time value. If they exercise the option, they get shares at the strike price. They capture the $10 of intrinsic value. But they destroy the $2 of time value. It just vanishes. Gone. They lit two dollars on fire for no reason.
No rational person does this. Instead, they sell the option on the open market for $12, capturing both the intrinsic and the time value. Exercise is almost always economically inferior to selling, because exercising throws away whatever time value remains.
The exception is dividends — if a stock is about to go ex-dividend and the dividend is larger than the remaining time value, early assignment becomes rational. But outside of that narrow window, you're safe. The time value in your ITM call is functioning as a kind of shield against early assignment. As long as there's meaningful time value, nobody's coming for your shares.
I explained this to my roommate once and she said, "So the thing protecting you is the same thing making you money?" Yes. Exactly. The time value is both the product and the insurance. That's why this works.
Why Not Just Sell OTM?
Fair question. OTM covered calls are fine. I'm not here to trash them. But here's what I've noticed after running both strategies side by side in paper trading for most of my freshman year:
OTM calls give you less premium and more directional risk. You're collecting a smaller credit because there's no intrinsic value — you're selling pure time value and hoping the stock doesn't rip past your strike. If it does, you've capped your upside and your shares get called away at a price that now looks cheap compared to where the stock went. That stings. ITM calls give you more premium and a built-in cushion. Because you've sold a call below the current stock price, you have downside protection equal to the time value you collected. If AAPL drops from $230 to $227, you're still fine — you collected $3.50 of time value, so your effective break-even is lower. The intrinsic value in the option decreases as the stock drops, which actually works in your favor when you go to buy it back. The trade-off is that you've capped your upside at the strike price from the start. If AAPL goes to $250, you don't get that ride. Your shares get called at $220 (though you've been collecting income the whole time, which softens the blow). But here's the thing — I'm not running this strategy on stocks I think are about to moon. I'm running it on positions I want to hold long-term and extract consistent income from. Different goal, different tool.The Spreadsheet Brain
My dad has this phrase — "the spreadsheet doesn't lie, but it also doesn't tell you everything." I think about that a lot. ITM covered calls look boring on a spreadsheet. The returns are steady. The P&L chart is a slow staircase instead of a rollercoaster. There are no screenshots worth posting on Twitter, no 10x plays to brag about in the group chat.
But I didn't get into finance for the screenshots. I got into it because I like things that work. I like systems that produce reliable outputs. I like the feeling of looking at a strategy from every angle, finding the edge, and then executing it with discipline over and over again until the math does what the math was always going to do.
Last semester, I took an intro probability course that spent three weeks on expected value. The professor kept emphasizing that expected value isn't about any single outcome — it's about what happens when you run the process enough times. The casino doesn't win every hand. It wins over thousands of hands because the expected value is in its favor on each one.
ITM covered calls are my casino math. Each roll captures a small, reliable credit. Over dozens of cycles, those credits compound into something real. It's not flashy. It's not going to make me internet-famous. But it's going to make me money, and I'll take that trade every single time.
What I'm Still Learning
I want to be honest: I'm nineteen. I've been paper trading this strategy for about eight months and running it with real capital for three. My sample size is small. There are market conditions I haven't traded through yet — real volatility spikes, earnings surprises, the kind of drawdowns that make your stomach drop and your fingers hover over the sell button.
I know that theta decay isn't always smooth. I know that implied volatility can crush your time value or inflate it in ways that make the rolls less predictable. I know that dividends are a real concern and I need to be watching ex-dates like a hawk. I know that the strategy works best in a sideways-to-slightly-bullish market and that a genuine crash will test my conviction in ways I haven't experienced yet.
But I also know that I've done the reading. I've done the math. I've sat in my dorm room at midnight running scenarios in a spreadsheet while my roommate watches reality TV in the background, and the numbers hold up. Not always. Not perfectly. But consistently enough that I trust the process.
My dad would say that's the most important part — trusting the process while staying honest about what you don't know yet.
I think about the kitchen table in Altadena a lot. My dad scrolling through options chains, pointing at numbers I didn't understand, trusting that someday I would. That not quite he showed me — the sliver of time value sitting on top of an ITM option like a quiet secret — turned out to be the foundation of how I think about the whole market. Value isn't always where people expect it. Sometimes the most interesting opportunity is in the thing everyone else dismissed because it didn't fit the default narrative.
ITM covered calls are not what they teach you first. They're not the strategy that gets engagement on FinTwit. They're the strategy that gets you paid, quietly, month after month, while everyone else is arguing about direction.
I'll take the quiet money. I've got time.
