What are In the money Covered calls?

In the money covered calls occur when you buy a stock and sell a call on it that has a strike price lower than the stock. There are a number of reasons for doing this.

Most people think Writing an in the money call option on a stock is a bad thing. After all why would you give someone else the right to buy your stock for less then you paid for it.

The reason is to reduce risk. Remember when you sell a call on a stock that is in the money you are going to generate a much higher premium from the stock then if you where to sell a call that is out of the money.

For instance, say you buy stock XYZ for $73 and sell the $80 call option on it giving the buyer the right to buy it at $80 in the future. From this you make $.70. The stock only needs to fall $.70 for you to be in the red.

If you sell the $65 call on it however you make $9.5. This gives your stock a lot more wiggle room, it could fall all the way to $65.01 by expiration and you would still receive maximum profit. In addition to that you would profit as long as the stock stayed above $73-$9.5 or $63.5 because of the premium you made.

Selling in the money covered calls is a way to lower your risk in of trading in volatile markets as well as keep a decent return on your money. It is more conservative then selling out of the money calls but that is not always a bad thing.