In the Money Covered Call: After more than 40 years of trading, Tom is comfortable giving up some potential gains. His priority is collecting recurring income without depending on a strong market rally. In this interview, he explains his “Income Shield” strategy, including entries, weekly management, trade examples, and risks.
Learn about In the Money Covered Call
Tom King
Tom King has traded for more than four decades and has been trading professionally for roughly the last 10 years. Through his Income Navigator service, he teaches options strategies, portfolio management, and risk management. He lives in Ohio, USA.
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How his In the Money Covered Call strategy works
A conventional covered call combines stock ownership with a short call option. Tom’s approach uses a long-dated, deep-in-the-money call as a stock replacement. He then sells a short-term, in-the-money call against it.
This makes Income Shield a variation of the poor man’s covered call. The difference is where he places the short strike: below the current stock price.
An in-the-money call contains two components:
- Intrinsic value: How much the call is in the money.
- Extrinsic value: The option’s price above its intrinsic value, reflecting remaining time and volatility.
Tom seeks to collect the short call’s extrinsic value repeatedly. Its intrinsic value provides a cushion against a decline in the underlying, although that protection is limited.
Choosing the underlying and strikes
King favors liquid options and quality underlying assets. He frequently trades indexes such as SPY and QQQ, along with gold and silver ETFs.
For individual companies, he considers revenue growth, earnings growth, return on equity, and free cash flow. He also wants an uptrend, preferably with a pullback toward support.
The long call typically expires in about one year, though he adjusts the duration to the opportunity. He generally selects a delta above 80, often around 90–95.
For the short call, he usually chooses a weekly expiration and a delta around 70. He also considers the expected move, average true range, and support levels when deciding how far in the money to sell.
The weekly income target
King targets approximately 1% of his investment in weekly extrinsic value. This is a target, rather than a guaranteed return.
In the QQQ example, he discusses buying a long call for approximately $32,500 and selling a weekly call containing $363 of extrinsic value—slightly more than 1% of the long call’s purchase cost.
The distinction matters: the entire premium received is not profit. Much of an in-the-money call’s premium is intrinsic value. Changes in the long call’s value also affect the position’s total return.
Tom says the strategy works best when the underlying moves sideways or gradually higher. A substantial, sustained decline can overwhelm the cushion.
Rolling the calls and managing declines
Tom generally aims to capture 80–90% of the short call’s extrinsic value before rolling it. That means buying back the existing short call and selling another, usually for the following week.
If extrinsic value disappears quickly, he may roll within the same expiration week. He normally leaves the long call in place while managing the shorts.
When the underlying approaches or falls slightly below his short strike, he may roll down and out for a credit. This repositions the short call and establishes another cushion.
He tracks each roll and the remaining extrinsic value. For King, a trading log is part of treating trading as a business.
When he closes the position
Tom’s profit target for the overall trade is generally 50–100%, depending on the position and remaining time. He also typically exits several weeks before the long call expires.
On the downside, he generally closes when the net position loss reaches approximately 30%, after accounting for covered call income. He sizes positions so that such a loss represents roughly 2–3% of his account’s net liquidation value.
If his original investment thesis breaks down, he may exit sooner.
What his examples show
In one silver example, Tom reports a 7.6% position return while the underlying had risen only about 0.4%. The short call income more than offset a loss on the long calls.
For the strategy over the preceding year, he reports an approximately 75% win rate and a 67% return measured against the investment in the long calls.
These are his reported results for that period, rather than an expected outcome for every trader.
The risks behind the cushion
A falling underlying remains the main risk. Other concerns include early assignment, dividends, wide bid-ask spreads, and delta inversion—where the short call becomes more sensitive to price changes than the long call, potentially causing losses during a rally.
Tom rates the strategy around five out of 10 for someone who understands options, sizes appropriately, and follows a management plan. For someone unfamiliar with its mechanics, he puts the risk higher.
His In the Money Covered Call approach exchanges some upside participation for recurring income and a downside cushion. Making that tradeoff work requires careful selection, active management, and a clear exit plan.
