ITM vs OTM Covered Calls: Which Strike Earns You More Income?

The Short Answer: It Depends on What You Mean by 'More Income'

An in-the-money (ITM) covered call pays a higher total premium upfront, but a large chunk of that premium is intrinsic value — not time value. An out-of-the-money (OTM) covered call pays less premium, but every dollar of it is pure time value you keep even if the stock goes nowhere. Which one earns you more depends on whether you measure income by raw premium collected or by net return after accounting for potential stock gains you give up.

Most retail covered-call sellers are actually asking two questions at once: How much cash hits my account today? And how much do I keep if the stock moves against me? This article walks through both questions with real numbers so you can pick the right strike for your situation.

What ITM, ATM, and OTM Actually Mean for Your Call

A call option is in the money when its strike price is below the current stock price. It is at the money (ATM) when the strike equals the stock price. It is out of the money when the strike is above the stock price.

For a covered-call seller, the strike you choose sets a ceiling on your profit. If you sell an OTM call, you still participate in stock gains up to the strike. If you sell an ITM call, you have already given up some of that upside — but you collected more premium to compensate.

Delta is the quickest way to gauge moneyness. The Options Industry Council (OIC) defines delta as the amount an option's price moves for a one-dollar move in the stock. A deep ITM call might have a delta of 0.80, meaning it moves almost dollar-for-dollar with the stock. A far OTM call might have a delta of 0.15. When you sell a call, you are effectively short that delta — so a high-delta ITM call gives you more downside cushion but caps your upside tightly.

A Real Worked Example: AAPL at $213

Let's say Apple (AAPL) is trading at $213 per share. You own 100 shares and want to sell a covered call expiring in 30 days. Here are three realistic strike choices:

• $205 strike (ITM, ~$8 in the money): Bid premium $12.40. Intrinsic value $8.00. Time value $4.40. • $213 strike (ATM): Bid premium $5.80. Intrinsic value $0. Time value $5.80. • $220 strike (OTM, ~$7 out of the money): Bid premium $2.65. Intrinsic value $0. Time value $2.65.

Raw premium collected favors the ITM call at $1,240 per contract. But look at what happens at expiration under three stock-price scenarios:

Scenario A — AAPL stays flat at $213: • ITM $205 call: You get called away at $205. Net = $205 + $12.40 premium − $213 cost basis = +$4.40/share ($440 total). • ATM $213 call: Called away at $213. Net = $0 stock gain + $5.80 premium = +$5.80/share ($580 total). • OTM $220 call: Expires worthless. Net = $0 stock gain + $2.65 premium = +$2.65/share ($265 total).

Scenario B — AAPL rises to $222: • ITM $205 call: Called away at $205. Net = +$4.40/share. You miss the $9 rally above your cost basis. • ATM $213 call: Called away at $213. Net = +$5.80/share. You miss the $9 rally. • OTM $220 call: Called away at $220. Net = $7 stock gain + $2.65 premium = +$9.65/share ($965 total).

Scenario C — AAPL drops to $200: • ITM $205 call: Expires worthless (stock below strike). Net = −$13 stock loss + $12.40 premium = −$0.60/share. The fat premium nearly made you whole. • ATM $213 call: Expires worthless. Net = −$13 stock loss + $5.80 premium = −$7.20/share. • OTM $220 call: Expires worthless. Net = −$13 stock loss + $2.65 premium = −$10.35/share.

The ITM call is the clear winner when the stock falls hard. The OTM call wins when the stock rallies past its strike. The ATM call is the middle ground that maximizes pure time-value capture on a flat or mildly rising stock.

The Real Risks You Need to Know Before Picking a Strike

Downside protection is not free. The extra premium from an ITM call looks great until you realize you are also accepting a near-certain assignment. FINRA notes that assignment can happen at any time on American-style options, not just at expiration. If you sell a deep ITM call and the stock surges, you will be called away well below the new market price and may feel the sting of missed gains.

Early assignment risk is real with ITM calls. The buyer of your call has the right to exercise early, especially around ex-dividend dates. If AAPL goes ex-dividend and your short call is deep ITM, the call buyer may exercise to capture the dividend. You would deliver your shares and lose the dividend you were counting on. The OIC has detailed guidance on this scenario in its covered-call education materials.

OTM calls carry their own trap: false security. A $2.65 premium on a $213 stock is only 1.2% downside protection. If AAPL drops 10%, you still lose roughly $18.75 per share net. Retail traders sometimes sell far-OTM calls thinking they are 'safe' because assignment seems unlikely — but they have barely hedged their stock position.

Volatility cuts both ways. When implied volatility (IV) is high — measured by indexes like the CBOE's VIX or AAPL's own IV rank — all premiums inflate. That is the best time to sell any covered call. When IV is low, OTM premiums shrink to almost nothing, making ATM or mild ITM strikes more attractive on a risk-adjusted basis.

How Taxes Change the Math for US and Canadian Investors

US investors: The IRS treats covered-call premiums as short-term capital gains in the year the position closes, regardless of how long you have held the stock — with one important exception. Under IRS Publication 550, selling a deep ITM call can suspend the holding period on your stock. If you were counting on long-term capital gains rates (currently 0%, 15%, or 20% depending on income) when your shares eventually get called away, a deep ITM call could reset that clock and push your gain into short-term territory, taxed as ordinary income. Always confirm your specific situation with a tax professional.

Canadian investors: The Canada Revenue Agency (CRA) treats covered-call premiums as capital gains or income depending on your trading frequency and intent. The CRA's Interpretation Bulletin IT-479R outlines when options transactions are considered on income account versus capital account. If the CRA classifies your activity as a business, 100% of premiums are taxable as income rather than 50% as a capital gain. Frequent strike-rolling and high volume can trigger that classification.

In both countries, the tax treatment of the premium is separate from the tax treatment of the stock gain or loss when shares are called away. Keep clean records of every premium received, every roll, and every assignment date.

A Simple Decision Framework: Which Strike Should You Choose?

Use this three-question filter before picking your strike:

1. Do you want to keep the stock? If yes, lean OTM. A higher strike gives the stock room to run before you lose your shares. If you are neutral or mildly bearish on the stock near-term, ATM or mild ITM makes more sense.

2. How much downside protection do you need? If you are worried about a 5-10% pullback, an ITM call with meaningful intrinsic value gives you a real buffer. An OTM call with 1-2% premium does not.

3. What is the implied volatility environment? In high-IV environments, OTM calls pay enough premium to be worth selling. In low-IV environments, you may need to go ATM or slightly ITM to collect a premium worth the trade-off.

A practical starting point many experienced covered-call sellers use: sell the strike with a delta between 0.25 and 0.40 for a balanced OTM position, or between 0.50 and 0.65 for a mild ITM position with meaningful downside cushion. These delta ranges are not magic numbers — they are a starting framework you adjust based on your outlook and tax situation.

Finally, always check the bid-ask spread before placing your order. Liquid names like AAPL, MSFT, NVDA, and SPY have tight spreads. Illiquid stocks can have spreads so wide that the 'premium' you see on screen evaporates at execution. The SEC's investor education resources emphasize that retail investors should use limit orders, not market orders, when trading options.

Does an ITM covered call always pay more premium than an OTM covered call?

An ITM call always has a higher total premium, but part of that premium is intrinsic value — the amount the option is already in the money. The time value portion, which is what you actually earn from selling volatility and waiting, is often highest right at the ATM strike. OTM calls have zero intrinsic value, so every dollar of their premium is time value.

What happens if my covered call goes in the money before expiration?

If your short call moves into the money before expiration, you face a higher probability of assignment, but assignment is not guaranteed until expiration unless the buyer exercises early. You can close the position by buying back the call at a loss and selling a new call at a higher strike or later expiration — a process called rolling. The OIC has free tutorials on rolling covered calls if you want to learn the mechanics.

Can I lose money selling covered calls?

Yes. The premium you collect reduces your cost basis, but it does not eliminate stock risk. If the stock drops sharply — say 20% — a small premium provides only a fraction of that protection. FINRA reminds investors that covered calls limit upside but do not fully protect against large downside moves in the underlying stock.

How does the strike price affect whether my shares get called away?

The lower the strike relative to the stock price, the more likely your shares get called away at expiration. A deep ITM call has a very high probability of assignment because the buyer will almost certainly exercise a profitable option. An OTM call expires worthless if the stock never reaches the strike, so you keep both the premium and your shares.

Does selling an ITM covered call affect my long-term capital gains holding period?

It can. Under IRS Publication 550, selling a qualified covered call — generally one that is not deep in the money — does not suspend your holding period. But selling a deep ITM call may suspend the holding period on your stock, potentially converting a long-term gain into a short-term gain when shares are called away. Canadian investors should review CRA Interpretation Bulletin IT-479R for how premiums are classified in their situation.

Is it better to sell weekly or monthly covered calls on the same strike?

Monthly options typically offer more total premium per contract, but weekly options let you reset your strike more frequently and react faster to price moves. The time-value decay rate (theta) accelerates in the final week before expiration, which is why some traders prefer weeklies to capture that faster decay. Your choice should weigh transaction costs, tax lots, and how actively you want to manage the position.