Writing ITM Call Option For Extra Profit

Short options are not "automatically exercised as soon as the sale goes through". For the most part, they are exercised:

• Prior to expiration when they trade at a discount

• In some instances when there is a pending dividend

• At expiration when the are ITM

If the underlying is $25, the $25 strike is ATM not ITM.

The advantage of selling an ITM call is downside protection. The deeper ITM the call is, the greater the amount of downside protection since you are selling more intrinsic value. The drawback is that the more ITM the call is, the lower the amount of time premium and therefore, the lower the upside profit potential.

The amount of downside protection versus time premium is the trade off. If you want more protection, you get less potential profit and vice versa.

A loose rule of thumb is that the premium for ATM options is related to the square root of the time remaining, with all other pricing parameters being equal. So if a 9 month option is trading for $3 (sq root of 9), it will be worth $2 at the 4 month mark (sq rt of 4) and $1 at the one month mark (sq rt of 1).

So with no dividends and no change in implied volatility, carry cost or underlying price, it takes 5 months to lose 1/3 of its value, 3 months to lose the next 1/3 of its value, and 1 month to lose the last 1/3 of its value. In real life, this comparison only holds true at a specific lower level of implied volatility and the relationship changes as IV changes as well as if the option is ITM or OTM. What does this mean in practical usage? Time decay is non linear which means that shorter term expiries offer more premium per day than longer term expiries. That’s why writers tend to sell nearer weeks/months and buyers tend to buy further out weeks/months.

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.