Okay, need the SF pros to 'splain this one to me.
Someone is telling me they sold some covered calls that were in the money at the time they sold them. If the premium was less than the strike price vs. spot the buyer could exercise immediately and profit, no? And the seller would lose.
If they were American calls then yes they could exercise them immediately and make a profit. If however they were European calls like most call options are then no they could not as European calls can only be exercised at a specific date in the future. This doesn't mean that the call wasn't mispriced as a call should always be worth more then the price of the underlying minus the strike price.
In your scenario S-K>C so S>C+K where S is the price of the underlying, C is the call price and K is the strike price. In this situation you could short your stock, buy a call and loan out the present value of K. At expiration you would collect K from your loan, use your call to buy the share for K and then close your short position with the share making a risk free profit. Therefore a call should always be worth more then S-K. Bit more complicated then just exercising the option, but yes there is an arbitrage opportunity if S-K>C