Buy-Write Covered Calls Strategy Should Generate More Income

Overview

The goal of this post is to look at the advantages and disadvantages of the buy-write strategy, in which an investor buys shares while simultaneously writing call options. The goal is to generate income via option premiums.

Benefits of the Buy-Write Strategy:

  • Reduce the cost basis of the stock you purchased.
  • It protects against the downside.
  • The downside protection provided by an ITM covered call call is larger, but the ROI is smaller.
  • OTM covered calls give a higher ROI, but give less downside protection if the price falls.
  • Easy to care for
  • If the initial covered call is broken, it is rather simple to implement a repair strategy.

Downside of the Buy-Write Strategy

  • Because the covered call premium should cap the maximum profit, the ROI is limited.
  • If the stock falls and you want to sell the position to avoid further losses, you must first buy back the call options before selling the stock.

Benefits of the ITM Covered Calls

  • Capture at least 15% of the downside risk.
  • It provides the highest premium and the most downside protection in the event of a stock decline or a declining market.
  • Because the calls are ITM, they are more likely to be assigned. You may take your profit and move on.
  • Very little maintenance

Downside of the ITM Covered Calls

  • When volatility is low in an uptrend market, profit margins are reduced.

Benefits of the OTM or ATM Covered Calls

  • When called out, the maximum profit is obtained.
  • Profitability increased when the covered call expired worthless and the stock was trading above the entry price at the time of expiration.
  • It works effectively in a market that is either neutral or rising.

Downside of the OTM or ATM Covered Calls

  • It is best to avoid using the buy-write strategy during earnings announcements if the stock drops abruptly due to weak earnings or future guidance.
  • The OTM or ATM covered calls provide less downside protection in comparison to the ITM.
Covered Calls Basics and Benefits

Updated:

6/13/2021 – revision and added Overview

5/2/2021 – version 1.0 added covered calls

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