Covered Write

investment

Opinion: Not Bearish to Bullish.

Example:

Short 1 Oct 60 Call @ 5 1/8
Long 100 Shares XYZ @ $60

Description: A Call option is written against a long stock position in XYZ. The shares can be purchased either prior to the Call being written (A.K.A. – Overwriting) or at the same time the Call is written (A.K.A. – A Buy write).

Synthetic: The strategy’s risk/reward profile is equivalent to a written Put!

When to use: Works well in neutral to bullish markets. Investor must be willing to sell XYZ at option’s strike price in exchange for the Call option premium received. ITM and ATM Calls are more defensive positions. OTM Calls are more aggressive (bullish).

Profit & Loss Characteristics: Profit potential is limited as long as the Call option is written. Losses are unlimited if XYZ declines.

Break-even Point: Purchase price of XYZ stock – premium received for Call.

Time Decay: Positive. Over time, the time value portion of the Call erodes (i.e., decays). At expiration, the Call’s value will equal its intrinsic value.

Volatility: An increase in volatility has a negative effect. A decrease has a positive effect. The higher the option’s implied volatility when written, the greater the premium received.

Assignment Risk: The investor must continuously monitor XYZ for possible assignment of in-the-money Call options prior to their expiration.