An option position which is established by simultaneously buying an asset and selling a call option on that asset. This strategy requires that an investor buy a stock, for example, and at the same time enter into a contract to deliver that stock to a counterparty should its price remain above or reach a specific level (the strike price) by a certain date. The buy-writer, who gives up some of the potential benefits of stock ownership, receives, at the initiation of the contract, the call option premium as a compensation. The amount of this compensation depends on the time to maturity, the difference between the strike price and the current price of the stock, the volatility of the underlying stock, and the amount by which the stock’s dividend yield exceeds that or a riskless alternative.
This strategy is applicable to various asset classes such as equity, currencies, bonds, or commodities.
The buy-write is also known as a covered call.
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