Tim Olson
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1.4 KiB
1.4 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A buy-write strategy combining long stock with a short call at strike K, generating income by capping upside in exchange for premium collected. |
|
Covered Call
Section: 2.2 | Asset Class: Options | Type: Income
Overview
The covered call (a.k.a. "buy-write") strategy amounts to buying stock and writing a call option with strike K against the long stock position. The trader's outlook is neutral to bullish. It has the same payoff as writing a naked put and allows the trader to generate income by periodically selling OTM call options while maintaining the long stock position.
Construction
- Buy 1 share of stock at price S0
- Sell 1 call option at strike K, receiving net credit C
Net position: long stock + short call
Payoff Profile
f_T = S_T - S_0 - (S_T - K)+ + C = K - S_0 - (K - S_T)+ + C
- Breakeven: S* = S0 - C
- Max profit: P_max = K - S0 + C (achieved when S_T >= K)
- Max loss: L_max = S0 - C (if stock goes to zero)
Key Conditions / Signals
- Neutral to mildly bullish outlook on the underlying
- Elevated implied volatility makes collected premium more attractive
- Suitable for income generation when the trader is comfortable capping upside at K
Notes
The covered call strategy is equivalent to writing a put option (short/naked put) in terms of payoff. Upside is capped at K; downside risk is the full cost of the stock minus premium received.