# Why isn't Intrinsic Value on an ITM Covered Call ever Profit/Earnings?



## zac (18 October 2011)

Ive a question that has me baffled and cant seem to get this answered adequately.
When writing a Covered Call (Buy/Write) In the Money (ITM) the premium is made up of Intrinsic Value & Time Value.
Supposedly the Intrinsic Value is Never Ever profit.
I can see how that is the case when exercised but assume the following scenario.

Share Price $110, Strike 100, Premium $11 (IV $10 + $1 Time value)

Ive bought the shares at $110 and earned $11 per share effectively taking my purchase price to $99.
If I dont get exercised and the Share Price at Option Expiry is now $105, What is my overall profit?
Just the overall $1 per share (time value)?? But if thats the case where did the other $5 go, ie the difference between the current share price ($105) and the Strike (100)

I just cant figure out where the Intrinsic Value money goes if youre NOT exercised and have been thinking everytime you do a covered call (buy/write) on the same shares ITM, you effectively keep lowering your share purchase price.

Id love if someone could shed some light on this.


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## village idiot (18 October 2011)

the answer is; because it just wouldnt happen.

You would always, (or at least close enough to always to count it as always), get excerised if the call is In The Money by any significant amount.
Whenever you do get excercised the profit is always the $1. 

In the unlikely event a $100 call wasnt exercised with the price at $105, then your (open) profit would be $6, which would be the $1 TV plus $5 of intrinsic value that someone has just donated you. But it wont happen often enough to worry about.


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## sails (18 October 2011)

Zac, if you owned the long ITM call at expiry - would you let it expire worthless?  Would you donate that money to another trader?  I am sure there are worthier causes.

And, the other thing that makes it unlikely, is that most exchanges or brokers have automatic exercise for any long option more than a set amount in the money - and it's usually a very small amount to trigger auto exercise.

It's one of the ways someone owning long options can find themselves in trouble if they have forgotten to check the positions prior to expiry.  They can find the next morning that are unintentionally either short or long shares.

But, if the unlikely event it happens, it's your lucky day and you will get more than your $1 extrinsic profit...


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## zac (18 October 2011)

Ok thanks for the heads up,
So in essence, its unlikely then it would NOT get exercised but if it didnt then the remainder Intrinsic value does become profit.

Thats what I was after and thanks.

As for getting exercised, I dont see why it would be exercised under those circumstances. The Intrinsic Value paid still doesnt make it such a good deal. Not saying it wouldnt happen but thats all another issue.


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