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In-The-Money Call Strikes: Intrinsic Value Protects Time Value

Strike price selection is one of the 3 required skills for covered call writing and put-selling. When we sell in-the-money call options we are protecting our positions to the downside while still generating the time value initial profits we have established in our strategy goals. In return, we are relinquishing any opportunity to generate additional profit from share appreciation. Another way to state this approach is that intrinsic value protects time value.


When to consider in-the-money call options

  • Bear markets
  • Volatile markets
  • Pre-event (Brexit, elections, Fed watch etc.)
  • Satisfies personal risk-tolerance


Methodology to select in-the-money call strikes

After establishing a watch list of eligible securities, we must select our target initial time value returns whether they are for in-the-money, at-the-money or out-of-the-money strikes. In my case, I target monthly 2% – 4% time-value in most market conditions and up to 6% returns in bull markets. For in-the-money strikes, the time value is calculated as follows:

Total option premium – Intrinsic value = Time value

Real-life example with Control4Corp (NASDAQ: CTRL)

With CTRL, a stock on our Premium Watch List at the time of this writing, trading at $32.78 on 11/8/2017, we will view the option chain for the 5-week expiration (11/15/2017):

covered call writing strike price selection

CTRL: 5-Week Options Chain

The $30.00 in-the-money strikes shows a bid price of $3.50. We cannot count this entire premium as initial profit because we can lose $2.78 on the sale of the stock. The Ellman Calculator will deduct this intrinsic value component to yield a time value initial profit. The $2.78, however, does represent protection of the time value. Consider the intrinsic value as an insurance policy paid for by the option buyer, not by us, the option-sellers. Let’s feed this information into the multiple tab of the Ellman Calculator.


The Ellman Calculator

covered call writing calculations

CTRL: Calculations with the Ellman Calculator

Once the blue cells are filled with the options chain information, the white cells will become populated. The red arrow shows the intrinsic value component of the $3.50 premium and this amount will be deducted to calculate the 2.4% initial 5-week return (yellow field). The downside protection (brown field) reflects the protection of this time value, not the breakeven (shown as $29.28). In this case the downside protection is 8.5%. This means that we are guaranteed a 5-week 2.4% return as long as share value does not decline by more than 8.5% by contract expiration. Stated differently, we are guaranteed a 2.4% return as long as share value does not decline from $32.78 to below $30.00 by contract expiration. It is important to remember that the trade-off is that should share value appreciate, we will not participate in those gains.



Selling in-the-money call strikes offers downside protection of the initial time value profits but will not allow for additional income from share appreciation. The approach can be summarized as intrinsic value protects time value.


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American Association of Individual Investors: Charlotte NC Chapter

Saturday June 9th 9 AM – 12 PM

“How to Generate Monthly Cash Flow and Buy a Stock at a Discount Using Two Low-Risk Option Strategies”

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All Stars of Options event at The Las Vegas Money Show at the Bally’s Hotel

Thanks to all our BCI members who attended and filling the room:


Market tone

This week’s economic news of importance:

  • Retail sales April 0.3% (expected)
  • Home builders index May 70 (last 68)
  • Business inventories March 0.0% (last 0.6%)
  • Housing starts April 1.287 million (1.290 million expected)
  • Building permits April 1.352 million (1.377 million last)
  • Industrial production April 0.7% (0.6% expected)
  • Weekly jobless claims week ending 5/12 222,000 (215,000 expected)
  • Leading economic indicators April 0.4% (last 0.4%)



Mon May 21st

  • Chicago national activity index April

Tue May 22nd

  • None scheduled

Wed May 23rd

  • Markit manufacturing PMI May
  • Markit services PMI May
  • New home sales April

Thu May 24th

  • Weekly jobless claims through 5/19
  • Existing home sales April

Fri May 25th

  • Durable goods orders April
  • Consumer sentiment index May

For the week, the S&P 500 moved down by 0.54% for a year-to-date return of 1.47%


IBD: Confirmed uptrend

GMI: 6/6- Buy signal since market close of April 18, 2018

BCI: Selling an equal number of in-the-money and out-of-the-money for new positions. 


The 6-month charts point to a neutral to slightly bullish tone. In the past six months, the S&P 500 was up 4% while the VIX (13.41) moved up by 22%. 

Wishing you much success,

Alan and the BCI team


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

18 Responses to “In-The-Money Call Strikes: Intrinsic Value Protects Time Value”

  1. Kaveh May 19, 2018 4:22 am #


    I have a question on 20/10 guideline (to buy back the options). I have noticed that as we are approaching the expiration the OTM calls do depreciate to low values needed in the 20/10 guidelines. However, the ITM or deep ITM calls never drop that low because of their intrinsic value. In fact they could go up as the stock’s value goes up because of the high delta that they have.

    Am I correct to conclude that we close the ITM or deep ITM calls as soon as their time value drops to 0? (if indeed makes sense to close them). If that is the case then we could close them mid-cycle (unwind strategy) as you have very clearly demonstrated in your material. If you could shed some light on my thinking here, I would greatly appreciate it.

    Thank you!


    • Alan Ellman May 19, 2018 7:24 am #


      You’re on the right track here…nice going.

      Deep ITM calls will depreciate in time value quicker than OTM strikes because of their higher Delta. Mid-contract, we close both legs of the trade (short call and long stock) when the time value approaches zero. The guideline we use is that if we can generate more than 1% over the cost-to-close in a new position, we execute the “mid-contract unwind exit strategy” (MCU exit strategy)

      Let’s take the same scenario as expiration Friday approaches where time value is approaching zero. At this point, there is no time value to generate in a new position for the same contract month so we decide whether “rolling” is an exit strategy consideration. In this case, it is important to check the earnings report date for the upcoming contract consideration.

      For more information on the MCU exit strategy:

      Complete Encyclopedia- Classic edition: pages 264 – 271

      Complete Encyclopedia- Volume 2: pages 243 – 252


      • Kaveh May 21, 2018 2:00 am #


        Great! I am delighted to hear from you that I am on the right track! I think it is coming together for me. I am a somewhat conservative investor and the ITM calls ( when it makes sense to use them) appeal to me because of their high premiums and their protection. But I had a problem with their intrinsic values….Because I could see that buying them back would create a net debit in my cash account because of their typically high intrinsic values. Now I can see that (if the situation is right) we can close them and get our ‘buy downs’ back. Moreover, selling the underlying rising stock (almost at the same time) makes the ‘buy downs’ a realized return whereas they were unrealized before. Then by buying a new stock and a new option in the same cycle we create more income in the same cycle…..thus a debit in the cash account ( as a result of the high buy back cost) can be eliminated using the MCU strategy. This looks like a great strategy and a very intelligent approach…. Especially since we are doing it relatively early and quickly in the cycle. Again please let me know if I am off…. but I think I’ve got it with respect to the management of the ITM situations.

        On a different note, I am planning to buy your book (Encyclopedia) which I’m sure is going to be a great resource, but which one do you recommend? the classic edition or volume-2 edition?


        • Alan Ellman May 21, 2018 7:09 am #


          You’re still on the right track. ITM strikes lower cost basis more than ATM and OTM strikes because of the additional intrinsic value component of the option premium. If we decide to close the ITM short call, the intrinsic value cost-to-close is “offset” by the now additional share value created by removing the ITM strike restriction. The disadvantage of ITM strikes relate to the fact that we will not be able to participate in any share appreciation after the trade is entered. The MCU strategy should always be considered if share price continues to rise.

          The “Complete Encyclopedia…”: classic edition should be read before Volume 2


  2. Jeremy May 19, 2018 5:31 am #

    Hi, Alan & what a great resource your website is !

    I have a long-term core holding of 2kg gold in my SIPP (UK equivalent of IRA), so $75k or so – the point being that I am not too concerned if it has periods of decline – so I thought to add a simple sell cash covered puts>if/when assigned, sell covered calls>if/when called restart cycle method using GLD. Probably one strike OTM for both puts & calls on a monthly / 6 week cycle.

    I have read McMillan on Options and also Leroy Gross'”Conservative Guide to Options”, what of your service is most relevant to my endeavour, please ?

    Thanks & greetings from the unusually sunny Netherlands, where I presently live.

    Best regards, Jeremy.

    • Alan Ellman May 20, 2018 7:09 am #


      The strategy you reference, I call the PCP (put-call-put) strategy. It is a solid strategy for those who have mastered the 3-required skills (stock selection, option selection and position management) for both put-selling and covered call writing.

      I prefer Monthly options but GLD has strong option liquidity so both Monthly and 6-week time frames will work. Aside from mastering those required skills (including knowing when to close the short calls or puts), we must also be sure the option returns meet our return goals. In the case of GLD, initial time value returns based on this model would be less than 1% per month.

      One final thought: In bear or volatile markets, consideration should be given to in-the-money covered calls for additional protection to the downside.

      Thanks to Jay for his excellent response.


  3. Jay May 19, 2018 9:18 am #

    Good morning Jeremy (It’s still morning in the States)

    I have never visited the Netherlands but understand it is beautiful. Alan will get back to you but I am a long time holder of GLD in my US IRA and usually over write at least part of it near the money on the high side every month. More so lately since it has been behaving somewhat bearishly but it is an investment for portfolio balance and not a trade.

    Should it wander ITM every now and then I usually buy the option back and roll it out and up. But even it assigned I then sell a near the money underneath cash secured put on a down day and resume the premium flow that way until I re-establish the position.Gold is not exactly a speeding train or biotech stock you need to chase :)! If SIPP works like US IRA’s none of that is a taxable event until ultimate withdrawal of funds.

    Have a great weekend! – Jay

  4. Barry B May 19, 2018 9:40 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 05/18/18.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    Since we are near the end of Earnings Season, be sure to read Alan’s article,”Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:


    Barry and The BCI Team

  5. Duminda May 20, 2018 5:12 am #


    About Exit strategies:

    – Do you sell the shares if the price has declined 8-10% regardless of the reason for the fall? I understand that if the reason for the fall is company specific, say for example, corporate fraud then we need to buy back the option at any cost and sell the shares immediately.

    – What if the 8-10% fall is due to a non-company specific event such as panic selling? Do you still sell the shares as per 20/10% guideline?

    I also noticed that in some of the examples given in your book on Exit Strategies, you have rolled down, as opposed to selling the shares, even when the price had fallen by more than 8-10%. These shares had also recovered later or enabled to reduce losses thereby justifying your decision to stay with the stock.


    • Alan Ellman May 20, 2018 8:21 am #


      The guideline I use is that if the stock performance is significantly under-performing that of the overall market (S&P 500), I will sell the underlyings after closing the short call. If the price decline was related to overall market downturn, I will lean to waiting to ‘hit a double” (after closing the short call) if early in the contract or rolling down in the latter half of a contract.

      “Exit Strategies for Covered Call Writing” was published in 2009 so many of the stocks had gone down in value due to the recession and overall severe market weakening.


  6. MarioG May 20, 2018 9:08 am #

    To all HQY Healthequity investors…
    I am posting on my cellthe first time so let’s see how this works…

    Just checked 5/18 premium report. Last weeks ER was 6/18. On the new report it is 6/4 and I verified this on earningswhisper web site.. So I must unwind before ER date.

    I rolled out and up 2 contracts HQY at 73.51 strike 70 to Strike 75 on 2 accounts with 4.6% static net gain and 6.5% if evercised with expiration Friday 6/15. No more.

    The old gain at strike 70 was 1.4% if assigned. I paid 3.59 for the BTC and 2.25 for the sell to open for the roll out up. In order to salvage the 1.4% I need to make up the time value of the BTC (.02/share) and 2 commissions (0.10 /share) = 0.12 . That is almost 0.2% (.12/70).

    Current position delta is 1 (Stock) – .4626 (delta of short call at .current strike 75) = 0.5374. So my profit would increase 0.54 if HQY rises $1. I only need 0.12 which is about 1/4 or 0.25 in underlying price. I need to unwind 73.51+ 0.25 = 73.76 or better.

    Closing Current price on 5/18 of HQY is 73.72. Almost there. If HQY keeps rising to higher levels I may do better than 1.4%.


    • MarioG May 20, 2018 10:33 am #

      Correction. The time value of the BTC to strike 70 is 0.08, not 0.02. (3.59 (premium) – (73.51 -70 intrinsic)) = 0.08. Adding the commission factor of 0.10, the needed rise in the profit or gain = 0.18. That’s 0.3% loss (.18 / 70). That’s significant.

      With a position delta of 0.5374, the 0.18 increase is a change of 0.34 in the underlying price (0.18 / .0.5374).

      So needed rise in HQY price is to 73.85 (73.51 + 0.34) to guarantee my original 1.4% ITM profit and nullify the roll out and up.


  7. Mike May 20, 2018 11:49 am #

    I have started to use a late collar strategy (I call it mid-contract profit lock-in) as an alternative to the mid-contract unwind in certain cases where the bid-ask spread on the in-the-money option becomes too wide to create a favorable exit.

    I have noticed that the bid-ask spread on the put at the same strike price as a way in-the-money call will often be much less wide than the bid-ask spread on the in-the-money call. This offers an alternate way to lock-in profits by purchasing the put in cases where the mid-contract unwind cannot be accomplished at a favorable price.

    It is best used for the following circumstances:

    1. The stock has earnings next month so you are looking to have it called away and will not be able to use a roll out or roll out and up at expiration anyways.

    2. The stock has increased sharply but is still at risk to reverse back down ( high beta stocks ).

    3. You want to completely eliminate risk in the position ( say you are on vacation and won’t be able to effectively monitor and manage any position adjustments ).

    4. The stock is problematic for legging out of the position, and a combined stock-option order will not execute at a favorable price.

    I have noticed a few situations recently where this strategy could be effectively used to lock in profits and prevent losses ( example I had ENTG 35 call strike in the April expiration cycle ).

    • Jay May 20, 2018 1:59 pm #

      Hey Mike,

      Thanks for the idea, I will look into that further! Please remember to sell any puts that you buy that go ITM at or before expiration or your broker will assign you the shares at the strike above market.

      Just sitting here on a hot New Orleans Sunday afternoon doing my usual thinking and planning for a new expiry. It really is an interesting time in the market. The major stock indexes are all above their 50 day MA’s while TLT and GLD are below theirs

      Isn’t this supposed to be “Sell in May and Go Away” season :)? Perhaps as with global warming market seasonality is shifting? It now seems the rough patches are later given no other factors. But it is more difficult to rhyme things with August and September I suppose :)?

      My two cents, likely worth barely a penny, is I am bullish the new expiry, will let more things run than not and will sell a few CSP’s on down days. There is not much premium out there at these VIX levels anyway so it is likely a good time to just let fast horses run…- Jay

      • Terry May 20, 2018 3:33 pm #

        Hey Jay;

        Agree with “…a good time to let fast horses run…”

        Just like JUSTIFY yesterday in the Preakness!



        • Jay May 20, 2018 6:52 pm #

          Thanks Terry,

          I am over weight Defense, Tech and Health Care at the moment and likely will not do much over writing for June. The premium just is not there versus the upside in my view.

          Since my earlier post I came up with a rhyme: “Try to remember to buy in September” ( a rip on the old songl ).

          We shall see if that catches on :)? – Jay

  8. Fred W May 20, 2018 2:48 pm #

    What about the tax implications of selling an in-the-money covered call? It is my understanding that if you are more than one strike in-the-money the IRS considers that you are “fully hedged” and they change the holding period which could mean you lose any Long-Term capital gain holding period potential tax treatment when/if you sell the underlying. Do you cover this in your materials?


    • Alan Ellman May 21, 2018 4:09 pm #


      I stay away from tax questions because I am not a tax expert and tax laws are constantly changing. That said, in the BCI methodology, when selling covered calls against shares in a long-term buy-and-hold portfolio (portfolio overwriting), we only use out-of-the-money strikes so diminishing or “frozen” holding periods would not apply. Any feedback from CPAs/tax advisors in our BCI community is welcome.


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