What Is an At-the-Money Covered Call?
An at-the-money (ATM) covered call involves selling a call option with a strike price equal to or very close to the current stock price. For example, if a stock trades at $100 and you sell a $100 call, this is an ATM covered call. ATM options have the maximum extrinsic (time) value of any strike price, making them the premium income sweet spot for covered call writers who prioritize income over capital appreciation.
ATM covered calls have a roughly 50% probability of being in-the-money at expiration (delta near 0.50). This means you have approximately equal chances of keeping your shares or having them called away. For investors who are truly neutral on the stock direction, ATM calls maximize the income you receive for the risk of losing your shares. The premium also provides moderate downside protection, typically 3-5% depending on volatility and time to expiration.
ATM options have the highest extrinsic (time) value of any strike price. This means ATM covered calls generate the most pure income per contract. Neither ITM calls (which include intrinsic value in the premium) nor OTM calls (which have lower total extrinsic value) match the ATM income potential.
How to Calculate ATM Covered Call Returns
- 1Premium is entirely extrinsic value ($4.00)
- 2Max profit = ($100 - $97 + $4.00) × 100 = $700
- 3Max return = $700 / $9,700 = 7.22%
- 4Breakeven = $97 - $4.00 = $93.00
- 5Downside protection = $4.00 / $100 = 4.0%
- 6Annualized return = 7.22% × (365/30) = 87.8%
ATM Covered Call Profit Scenarios
| Stock at Expiry | Stock P&L | Option P&L | Total P&L | Return |
|---|---|---|---|---|
| $110 | +$300 | -$600 (bought back) | $700 (capped) | 7.22% |
| $105 | +$300 | -$100 (bought back) | $700 (capped) | 7.22% |
| $100 | +$300 | +$400 (expires) | $700 | 7.22% |
| $97 | $0 | +$400 (expires) | $400 | 4.12% |
| $95 | -$200 | +$400 (expires) | $200 | 2.06% |
| $93 | -$400 | +$400 (expires) | $0 | 0% (breakeven) |
| $90 | -$700 | +$400 (expires) | -$300 | -3.09% |
When to Use ATM Covered Calls
- You have a neutral outlook and expect the stock to trade sideways
- You want to maximize premium income from time decay
- You are comfortable with a 50% chance of having your shares called away
- Implied volatility is elevated, making ATM premiums particularly attractive
- You plan to sell the stock soon anyway and want to collect premium while waiting
- You are building a consistent monthly income strategy and want predictable returns
ATM Covered Call vs. Other Strikes
Deciding Between ATM, ITM, and OTM
For maximum monthly income, sell ATM calls with 30 days to expiration and close them when they have lost 50% of their value (typically around day 15-20). This captures most of the time decay in the first half while freeing you to sell a new call sooner, increasing your annual number of trades.