Tim Olson
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33 lines
1.4 KiB
Markdown
33 lines
1.4 KiB
Markdown
---
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description: "A buy-write strategy combining long stock with a short call at strike K, generating income by capping upside in exchange for premium collected."
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tags: [options, income, covered, bullish]
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---
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# Covered Call
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**Section**: 2.2 | **Asset Class**: Options | **Type**: Income
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## Overview
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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.
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## Construction
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- Buy 1 share of stock at price S0
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- Sell 1 call option at strike K, receiving net credit C
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Net position: long stock + short call
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## Payoff Profile
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f_T = S_T - S_0 - (S_T - K)+ + C = K - S_0 - (K - S_T)+ + C
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- Breakeven: S* = S0 - C
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- Max profit: P_max = K - S0 + C (achieved when S_T >= K)
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- Max loss: L_max = S0 - C (if stock goes to zero)
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## Key Conditions / Signals
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- Neutral to mildly bullish outlook on the underlying
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- Elevated implied volatility makes collected premium more attractive
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- Suitable for income generation when the trader is comfortable capping upside at K
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## Notes
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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.
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