Defensive Income with Protection
The in-the-money covered call is a more conservative approach. By selling a call with a strike below the current stock price, you get immediate downside protection from the intrinsic value. The tradeoff is lower returns and capped upside, but it's ideal for uncertain markets.
Based on example: Own AAPL at $150, Sell $145 call for $8.00
A 0.70 delta means the strike is in-the-money, providing intrinsic value as downside cushion. The higher delta reflects a higher probability of assignment.
Same theta decay optimization as standard covered calls. The time value portion of the premium still decays favorably in this window.
We target at least 3% downside protection from the intrinsic value. This provides a meaningful buffer against small pullbacks while still capturing time premium.
ITM covered calls are defensive plays, often used when you're worried about near-term downside or want to exit a position profitably. Choose stocks where you have gains you want to protect, or where you see limited near-term upside. This strategy is also useful for stocks that have run up significantly and you want to lock in gains while collecting additional premium.
This section explains our approach to filtering trades. These are our choices based on our analysis - you may prefer different criteria for your trading style.
Selling an ITM covered call is a defensive play. Unlike OTM calls (which maximize income), ITM calls are designed to guarantee a sale while protecting against moderate stock drops. The key insight: you're not looking for the highest total premium - you're looking for the highest extrinsic value (time value) relative to risk.
We target ~0.70 delta as a balanced middle ground between protection and profit. Higher delta means more protection but less profit. This gives us meaningful downside cushion without sacrificing too much time value.
We want meaningful protection - at least 5%. Why not 3%? Because 3% can evaporate in a single volatile day. A 5% buffer gives us real breathing room if the stock pulls back unexpectedly.
Since this strategy ties up capital (you own shares), we want returns that beat simpler alternatives. We set our minimum at 8% annualized return on capital. Below that, you might be better off with other strategies.
For ITM covered calls, extrinsic value (time value) is your true profit. Total Premium = Intrinsic Value (owed to buyer) + Time Value (YOUR profit). When the stock is called away, you receive Strike Price + Premium, but your actual profit is just the time value portion.
Shallow ITM (~0.60 delta): 2-3% protection, higher time value, best for stocks you think will stay flat. Deep ITM (~0.80+ delta): 10%+ protection, very little profit, best for high-volatility stocks or as a "synthetic bond". We target ~0.70 delta as a balanced middle ground.
Be careful with ITM calls near ex-dividend dates! If the upcoming dividend is greater than the remaining time value, you'll likely be assigned early and miss the dividend. Our screener doesn't currently filter for this - check manually before earnings seasons.