The scenario
You own a stock. It pays you a dividend of around 4.5% per year. Solid income. You like that.
But you've been watching the company closely, and your gut is telling you the growth story is done for now. The stock just had a solid run-up in value, and you're thinking that money could be working harder somewhere else over the next 5 years. You've already got your eye on where you want to move it.
There's just one problem.
The tax year is ending soon and you've already had a good income year. If you sell the stock now, you're handing a meaningful chunk of that gain straight to the tax office — on top of everything else you've already earned this year.
So you wait. But waiting means sitting in a position you've mentally already moved on from.
The deep-in-the-money covered call
You sell a call option on your stock — but not just any call. You go deep in the money, meaning you choose a strike price well below where the stock is currently trading.
Why deep in the money? Because at that level, you're almost certain the stock will be called away from you at expiry. It is highly likely the stock will never end the contract lower than that strike price.
And that suits you perfectly.
You've already decided in advance to sell your stock. You're completely comfortable with that outcome. It's essentially a sale you've already committed to — just delayed to the other side of the tax year.
What the option price looks like
Because your strike is already below the market price, the contract carries intrinsic value inside it from the moment you sell it. The stock is already worth more than your strike, so that gap is baked into the premium you receive.
On top of that intrinsic value, you collect a little extrinsic premium as well — time value. So your total premium received reflects both.
While you wait
While you wait for expiry, you are still holding the stock. So the dividend keeps paying. You're collecting your 4.5% income. You have the premium from the option sale sitting in your account.
And your effective exposure to the stock dropping has been dramatically reduced — because the deep-in-the-money strike gives you a significant buffer before any downside actually starts hurting you. The stock would have to fall all the way below your strike before you felt real pain. And at that level, you'd essentially be buying it at a bargain anyway.
The outcome
When expiry arrives after the new tax year begins, the stock gets called away. You receive your money clean, and now you're free to rotate into exactly what you were eyeing off all along — in a new tax year, with a fresh income slate.
That is one example of how investors use options practically — not to speculate, not to chase volatility, just to solve a problem that straight buying and selling could not.
The simpler income version
You can also use this strategy to just make extra money from holding your stock.
You could sell a call option at a strike at-the-money, or just outside the money above market price, and get a larger premium into your pocket. Some investors do this month after month to make extra income.
The world is large with options.