A combination of a call option and the underlying asset. The buy-writer becomes a fixed income investor if the underlying stock rises and an equity investor if it falls. However, the buy-writer may be better off if the stock remains within a specific range, because the lack of movement and the passage of time work to the advantage of the buy-writer. The investor would pocket both the stock return and the short call premium.
The covered call write is also known as a buy-write.
For a graphic illustration, see: covered call write- exhibit.
Comments