Why would someone sell ITM options
Why would anyone want to sell call options?
If you expect prices to drop, selling a covered call is a poor way to protect your stocks. Even using ITM options, if the stock price falls, the delta of the call would decrease and the amount of hedging per fall point of the underlying asset would decrease. IOW, the more the stock fell, the faster your losses would accrue until they approach 1 to 1.
Your premise addresses when you don't want to sell a covered call. However, there are reasons to sell them. It is less common to own stocks that have risen and have a slightly higher price target. Selling a CC at a nearby strike price generates some premium income while waiting.
What your question is ignoring is that covered call writing is implemented when one has a neutral to slightly bullish outlook for the stock. While it offers modest protection against downside moves, its primary goal is to increase income through stock ownership. The position will outperform the stock if the stock price falls, doesn't go anywhere, or rises a little. A big uptrend is a loss of opportunity because you are not participating above the strike price. Writing covered calls will reduce the volatility of the portfolio.
Covered calls and their synthetic equivalent short put have asymmetric risk (limited upward trend with most of the downside risk). There is an old saying about them: "Most of the time you eat like a bird and sometimes you are not like an elephant." In good years you will be lagging behind the market. In bad years, you will lose, but you will outdo the buy and the owner.
Now that I've told you the bad news (g), it really isn't that bad. According to CBOE statistics:
The CBOE's BXM index represents the return on a monthly buy-write strategy in which the S&P 500 is bought and an at-the-money call is written. Over the past 30 years, the S&P 500 has achieved an annual rate of 9.9% with a standard deviation of 15.3%. The BXM returned 8.9% with a standard deviation of 10.9%
The CBOE's BXMD index represents the return on a monthly buy-write strategy in which the S&P 500 is bought and a call is written 30% out of the money. Over the past 30 years, the S&P 500 has achieved an annual rate of 9.9% with a standard deviation of 15.3%. The BXMD achieved a return of 10.7% with a standard deviation of 13.2%
If you have superior timing and selection skills, you shouldn't have monkeys with muted calls and short puts. Because of their asymmetrical R / R, my preferred income strategy is vertical and diagonal spreads where there is a protective floor and unexpected surprises don't hit me.
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