Using an ITM call to lock in profits while staying in the game
Active trader, 5 years options experience
$120,000
Protect gains on MSFT while generating income
MSFT has run up 12% in 6 weeks. David bought at $405 and it's now at $455. IV is at 22% - near the low end of MSFT's typical 20-35% range. Low IV means cheaper options, which is actually good for ITM covered calls because you're buying back intrinsic value, not inflated time premium. MSFT averages about 0.8-1.2% daily moves; at 22% IV, the market expects that to continue.
David is sitting on a $5,000 gain (100 shares × $50 gain). At $45,500, his MSFT position is 38% of his portfolio - right at the edge of his comfort zone. He's nervous about giving back gains but doesn't want to sell and trigger a $1,000+ tax bill. The ITM covered call lets him protect profits while staying in the game.
Opens The Greeks Report and selects "ITM Covered Call"
Looks for strikes 3-5% in the money for good protection
Finds the $440 strike (3.3% ITM) with $21.80 premium at 0.68 delta
Calculates: $15.00 intrinsic ($455 - $440) + $6.80 extrinsic (time value)
The $6.80 time value is his max profit - plus he has $15 of downside protection (3.3%)
David opens his broker to confirm. MSFT ticked up $2 since the data refreshed. The $440 call now shows $23.50 ($17 intrinsic + $6.50 extrinsic) at 0.70 delta. "Even better," he thinks. "More intrinsic protection, same time value to capture."
Why this trade: The $440 strike gives David protection down to $433.20 (breakeven = $455 - $21.80). That's a 4.8% cushion before he loses money. If MSFT crashes 10%, he loses $2,700 instead of $4,550. If it keeps rallying? He makes $650 max (the extrinsic value) but gets called away at $440.
$440 Call (ITM)
April 17th (38 DTE)
$21.80 per share ($15.00 intrinsic + $6.80 extrinsic)
1
$680 (extrinsic value only)
$43,320 (if MSFT goes to $0)
$433.20 (stock price - premium)
$45,500 (shares already owned)
65%
Trade entered. David now has $15 of built-in protection (3.3%) and $6.80 of time value to capture. His delta of 0.68 means he keeps 32% of any upside.
Stock dropped $10 but the option only dropped $8.40. The 0.68 delta absorbed most of the blow. Without the ITM call, David would be down $1,000. With it, only -$160.
Stock continued lower, now below strike. Option absorbed $1,460 of the $1,650 drop. Delta dropped to 0.48 as option went ATM. David is only down $190 vs. $1,650 without protection.
Stock bounced $9.50 from the low. David is now profitable. The delta of 0.60 means he participated in 40% of that bounce (the rest went to the call buyer).
Stock pulled back again to $442. Theta decay of $14/day is accelerating with 6 days left. David decides to close and lock in profits.
Day 32
$5.80
+$300
0.7% in 32 days (7.8% annualized)
Why exit here: David captured 44% of max profit ($300 of $680). More importantly, he protected his gains during a volatile month. The stock ended $13 lower than entry, but he's up $300 instead of down $1,300. That's the power of ITM covered calls.
ITM covered calls are insurance, not lottery tickets - you trade upside for downside protection
The extrinsic value is your real profit target, not the full premium. David's $21.80 premium was mostly intrinsic ($15)
In choppy markets, the protection lets you sleep at night - David weathered a $16.50 drawdown and still profited
Delta tells you your upside participation: 0.68 delta = you keep 32% of rallies, give up 68%
Always verify prices - a $2 stock move can change your intrinsic/extrinsic split significantly