Deep ITM vs. OTM Covered Calls: Which Pays More and Risks Less Assignment?

The Short Answer: It Depends on What You're Optimizing For

Deep in-the-money (ITM) covered calls collect more total premium upfront, but most of that premium is intrinsic value — not income. Out-of-the-money (OTM) calls collect less total premium but keep more of your upside and carry a lower probability of assignment. If your goal is pure cash income with downside cushion, deep ITM calls can work. If your goal is keeping the stock while generating yield, OTM calls are usually the better fit.

This is the core trade-off every covered-call seller faces. Neither choice is universally better. Understanding exactly what you give up and gain with each approach is what separates consistent income traders from frustrated ones.

What 'Deep ITM' and 'OTM' Actually Mean in Practice

A call option is in the money when the strike price is below the current stock price. It is out of the money when the strike is above the current stock price.

For example, if Apple (AAPL) is trading at $195, a $175 strike call is deep in the money by $20. A $210 strike call is out of the money by $15. A $195 strike call is at the money (ATM).

The deeper ITM you go, the higher the option's delta — a number between 0 and 1 that measures how much the option price moves for every $1 move in the stock. Deep ITM calls have deltas close to 1.0, meaning they move almost dollar-for-dollar with the stock. Deep OTM calls have deltas close to 0. The Options Industry Council (OIC) describes delta as one of the most practical tools for estimating assignment probability: a delta of 0.80 means roughly an 80% chance the option expires in the money.

Worked Example: AAPL at $195 — Three Strikes, Three Outcomes

Let's say AAPL is trading at $195 and you own 100 shares. You are looking at options expiring in 30 days. Here are three realistic scenarios using approximate mid-market prices:

**Strike $175 (Deep ITM, $20 in the money)** Premium collected: ~$21.50 per share ($2,150 total) Intrinsic value: $20.00 Time value (your actual income): ~$1.50 Delta: ~0.92 Assignment probability: ~92% Max profit if assigned: $175 – $195 cost basis + $21.50 premium = depends on your cost basis. If you bought AAPL at $180, your gain is $175 – $180 + $21.50 = $16.50/share. Downside protection: The $21.50 premium cushions losses down to $173.50.

**Strike $195 (At the Money)** Premium collected: ~$5.80 per share ($580 total) Intrinsic value: $0 Time value: ~$5.80 Delta: ~0.50 Assignment probability: ~50% Max profit if assigned: capped at $195 strike + $5.80 premium received. Downside protection: $5.80 cushion, stock protected down to $189.20.

**Strike $210 (OTM, $15 out of the money)** Premium collected: ~$1.90 per share ($190 total) Intrinsic value: $0 Time value: ~$1.90 Delta: ~0.25 Assignment probability: ~25% Max profit if assigned: $210 – your cost basis + $1.90 premium. Downside protection: Only $1.90 cushion, stock protected down to $193.10.

The key insight: the deep ITM call looks like it pays the most ($2,150), but $2,000 of that is intrinsic value you are essentially handing back to the buyer as a discount on the stock. Your real income — the time value — is only $150. The ATM call generates $580 in pure time value. The OTM call generates $190 in pure time value but lets you keep the stock if AAPL stays below $210.

Assignment Risk: How Real Is It and When Does It Hurt?

Assignment happens when the option buyer exercises their right to buy your shares at the strike price. With American-style options — which is what most US-listed equity options are — the buyer can exercise any time before expiration, not just at expiration. FINRA and the OIC both note that early assignment is most common just before an ex-dividend date, because buyers want to capture the dividend.

For deep ITM calls, assignment risk is high and nearly constant. If AAPL is at $195 and you sold the $175 call, that option is $20 in the money. A rational buyer has almost no reason not to exercise it, especially near expiration or before a dividend. You should expect to sell your shares.

For OTM calls, assignment only happens if the stock rallies past your strike before expiration. If you sold the $210 call and AAPL stays at $195, you keep the premium and the shares. That is the appeal.

The risk that gets overlooked with OTM calls is not assignment — it is the stock dropping. A $1.90 premium on a $195 stock is less than 1% downside protection. If AAPL drops to $170, you still own shares that are down $25, and your $1.90 premium barely dents that loss. Deep ITM calls, by contrast, give you a much larger cushion. The $21.50 premium on the $175 call protects you all the way down to $173.50 before you start losing money.

Tax Implications You Cannot Ignore

The IRS and CRA both treat covered-call assignment as a stock sale. When your shares get called away, you trigger a capital gain or loss based on your cost basis in the stock and the strike price you received — plus the premium you collected.

For US investors, the IRS has specific rules under Section 1221 and the qualified covered call regulations. If you sell a deep ITM call, the IRS may suspend the holding period on your shares. This matters if you are trying to qualify for long-term capital gains rates. According to IRS Publication 550, a call is generally considered deep in the money if the strike is more than one strike increment below the stock price. If your holding period gets suspended and you are assigned, gains that would have been long-term may be taxed as short-term — at ordinary income rates.

Canadian investors should note that the CRA treats option premiums as capital gains in most covered-call situations, but the rules depend on whether the activity is considered a business. The CRA's Interpretation Bulletin IT-479R covers transactions in securities and is worth reviewing with a tax advisor.

The practical takeaway: before selling a deep ITM call on a stock you have held for 11 months hoping to hit the 12-month long-term threshold, check with a tax professional. The premium income is not worth losing the preferential tax rate on a large gain.

Which Strategy Fits Which Investor?

Deep ITM covered calls make the most sense when you are already planning to sell the stock, want maximum downside protection, or are indifferent to being assigned. Some traders use deep ITM calls as a disciplined exit strategy — they set a price they are happy to sell at and collect extra premium while they wait.

OTM covered calls make the most sense when you want to keep the stock long-term, believe in its upside, and are using the premium as a yield enhancement on a position you would hold anyway. This is the most common approach for long-term investors who own quality stocks like AAPL, MSFT, or SPY and want to squeeze extra income without disrupting their core holdings.

ATM calls sit in the middle. They generate the most pure time value (extrinsic value) per dollar of risk, which is why many professional traders default to ATM or slightly OTM strikes. The 30-delta to 40-delta range — meaning strikes with a delta between 0.30 and 0.40 — is a common starting point cited by the CBOE and OIC educational materials as a balance between income and assignment risk.

There is no single right answer. The right strike depends on your cost basis, your tax situation, your outlook on the stock, and how you would feel if the shares got called away tomorrow.

A Quick Decision Framework Before You Place the Trade

Before picking a strike, answer these four questions:

1. Do I want to keep this stock? If yes, lean OTM. If you are neutral or want to exit, ITM is fine. 2. What is my cost basis and what is my tax situation? A deep ITM call on a stock with a large unrealized gain could trigger a taxable event and potentially convert long-term gains to short-term. Review IRS Publication 550 or consult a tax advisor. 3. Is there a dividend coming? If the stock pays a dividend before expiration and your call is deep ITM, expect early assignment. You will lose the dividend and the remaining time value. 4. How much downside protection do I actually need? If the stock is volatile, a $1.90 OTM premium on a $195 stock is almost meaningless protection. A deeper strike gives you a real cushion.

Once you answer those four questions, the right strike usually becomes obvious. The goal is not to maximize the dollar amount of premium collected — it is to collect the right premium for your specific situation.

Do deep in the money covered calls always get assigned?

Not always, but the probability is very high — often 85% to 95% depending on how far ITM the strike is. The OIC notes that delta approximates assignment probability, so a deep ITM call with a 0.90 delta has roughly a 90% chance of expiring in the money. If you sell a deep ITM call, you should mentally prepare to have your shares called away.

Which covered call strike makes the most money?

It depends on what happens to the stock. If the stock stays flat or rises, OTM calls let you keep the shares and collect premium, which can outperform over time. If the stock drops significantly, deep ITM calls win because the larger premium cushions more of the loss. ATM calls typically generate the highest pure time value per trade, which is why many experienced traders start there.

Can I lose money selling covered calls?

Yes. The premium you collect reduces your loss but does not eliminate it. If you sell an OTM call and the stock drops 20%, your $1.90 premium barely helps. Covered calls cap your upside and provide only limited downside protection — they do not make a falling stock safe. FINRA's investor education materials emphasize that covered calls are not a hedge against major declines.

What happens to my covered call if the stock pays a dividend?

If your call is in the money before the ex-dividend date, the option buyer may exercise early to capture the dividend, which means your shares get called away and you miss the dividend payment. This is one of the most common causes of early assignment on American-style equity options. Always check the ex-dividend date before selling an ITM call.

Does selling a deep ITM covered call affect my long-term capital gains tax treatment?

It can. The IRS has qualified covered call rules under Section 1221 that may suspend your holding period if the call is considered deep in the money, potentially converting long-term gains to short-term gains taxed at ordinary income rates. IRS Publication 550 covers this in detail, and Canadian investors should review CRA Interpretation Bulletin IT-479R. Consult a tax professional before selling deep ITM calls on appreciated positions.

What is the best covered call strategy for someone who never wants to lose their shares?

Sell OTM calls with a strike price above a level you would genuinely be happy selling at, and choose a delta of 0.20 to 0.30 to keep assignment probability relatively low. You can also buy back the call before expiration if the stock rallies toward your strike — this is called a closing purchase and lets you avoid assignment while keeping the stock. The CBOE and OIC both offer free educational resources on managing covered call positions before expiration.