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Say I buy 100 shares of XYZ at $20 a piece, and it rises in price to $25 a share. Is there any downside to writing/selling an ITM call option at a strike price of $25/share as far as I can in the future (assuming there is an open ask for it) to gain extra profit in the proceeds I get from selling that option?

Does this tactic rely on the assumption that the option will be automatically exercised as soon as the sale goes through?

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Depending on your broker, one downside is that you may be required to "buy to close" your option before selling your stock. This may go against you if the stock starts to drop and you want to sell, as you'll have to pay the time premium at that time.

Selling calls (or puts for that matter) gives you immediate income, but limits your upside and makes you short volatility. If the volatility of the stock goes up, it may cost you more that what you make when you need to cover your position in the scenario above.

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There are advantages and disadvantages to writing ITM calls. However, before explaining that, if the underlying is $25, the $25 strike is ATM not ITM. Perhaps you meant writing a $20 ITM call?

It is incorrect to assume that any option written would be "automatically exercised as soon as the sale goes through".

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  • I guess then the scenario should be the stock reaches $25.01 (or higher) and then a $25 call is written for far in the future – bhooks May 19 at 16:08
  • The strategy of selling ITM options is to capture some intrinsic value in order to provide some downside hedging should the underlying move against you. So while it is correct that a $25 call would be ITM with the stock at $25.01, it's splitting hairs on a technicality to consider that to be ITM. So while there is ONE CENT of intrinsic value, I'd offer that it's equivalent to selling an ATM call. The gist of the question should be "Does it make more sense to write covered calls far in the future?" – Bob Baerker May 19 at 16:22

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