The Covered Call / Buy-Write Options Strategy

Provided By Options University

Is This An Options Strategy That Will Suit You?

For better or worse, most investors purchase stocks with the intent of holding their shares for an extended period of time.

We do this mainly because the media and industry professionals have drilled into our heads, year after year, time after time, that it’s best to buy and hold. The recent bull market phenomenon also fueled this mindset because the ‘buy and hold’ options strategy worked extremely well - for a while.

Whether or the not the ‘buy and hold’ options strategy is still the most efficient way of investing remains a topic for discussion. However, it is still the options strategy that most investors are comfortable with and tend to follow.

The first options strategy we will discuss is a hybrid of the buy and hold options strategy, one that provides for better and more consistent returns a large majority of the time when compared to naked stock ownership alone.

When we buy a stock, there are three possible outcomes. Two of these scenarios are generally negative and only one outcome is generally positive. If the stock goes up, that is good. If the stock goes down, that is bad. And if the stock stays still, that is also a bad outcome.

To briefly recap, not only do you have a loss in opportunity cost (the money invested in your stagnant stock could be making you money if somewhere else) but also, you have incurred commission costs on both the way in and way out. So, in this case, only one of the three scenarios provides a positive return.

For the sake of description, we will identify the three potential scenarios as the “up” scenario, the “down” scenario and the “stagnant” scenario. By employing the covered call or “buy-write” options strategy, you can change the outcome of the scenario profile so you have two positive potential results instead of only one.

Employing the covered call or “buy-write” options strategy, we still have the “up” scenario as a positive result, but now the “stagnant” scenario will also produce a positive result since we collect a premium and the third scenario, the “down” scenario will not be as negative.

Thanks to the covered call options strategy, now two of three scenarios end in a positive result and the third has a result that is less negative.

Let’s take a closer look at the covered call options strategy and its construction. There are two components of the covered call options strategy, the stock component and the option component.

The stock component of this options strategy consists of a long stock position (you own stock). The option component consists of selling one call per every one-hundred shares of stock owned.

Remember, one option contract is worth one hundred shares of stock. So for example, 1000 shares of stock equals 10 call contracts or 200 shares equals 2 call contracts.

The chart below shows more examples of the proper construction of buy-writes.

Please take special note that the ratio of stock to calls must be exactly 100 shares to 1 option contract.

For chart below, stock price = $35.00

Number of Shares Owned
Call Contracts to Sell



The philosophy behind the covered call options strategy is not complicated. It entails using a long stock position along with a short call option to create a positive stream of additional income, much in the same way a person would purchase a house and then lease it out to collect rent in order to pay for the mortgage.

The constant and reoccurring collection of option premiums works better if done over longer periods of time (for example, one year.) That time frame allows the odds to play into your favor.

Now let’s talk about the odds involved in this options strategy. There have been several studies done on the topic of premium buying versus premium selling. The goal of the studies was to determine whether it is better to buy options or sell options.

Recent studies have found that selling the premium was the correct trade 78% to 83% of the time. That is a very high percentage and is worth taking advantage of when a good opportunity presents itself.

The covered call options strategy takes advantage of the fact that an option is a depreciating asset because its extrinsic value goes to zero at expiration. The process by which an option’s extrinsic value dissipates is called time decay.

While buying naked calls and puts can provide some of the biggest leverage and highest returns, they can also involve the most risk. This strategy should only be used by experienced options traders or traders using risk capital.

Discover these secret option trading strategies that will have your friends calling YOU 'the options expert' Click here!

"You’re About To Learn Secrets Most Traders Will Never Know About Profitable System Trading..."

Inside you’ll learn...

  • How to design a winning system from scratch and exactly what to do to supercharge your current stock trading system!

  • The one ingredient you literally "Drop" into your stock trading system that can triple your profit!

  • How to use “secret” money management techniques to minimize your risk.

  • The tools the professionals use and how you can get huge discounts (charting software, data, etc).

  • And you'll also get a FREE copy of David Jenyns’ complete Ultimate Trading Systems Course…

    Just enter your name & email - then click the “Click Here For Free Instant Download!” button. (All information kept 100% confidential). The download details will be emailed to you immediately.


  • We take your privacy very seriously. My personal privacy guarantee to you. I respect your privacy and will never share your email address with anyone. You can easily unsubscribe at any time. View our Privacy Policy - David Jenyns Founder of


    copyright 2005 Options Strategy