Definition of Buy-write:
This strategy assumes the market price for the underlying security will likely fluctuate only mildly and possibly rise somewhat from current levels before expiration. If the security declines in price or at least does not rise strongly, then the investor writing the call option gets to keep the premium received from the options sale. This strategy can be periodically repeated to increase returns during a time when the movement of the security is lackluster.
Buy-write is an option trading strategy where an investor buys a security, usually a stock, with options available on it and simultaneously writes (sells) a call option on that security. The purpose is to generate income from option premiums. Because the option position only decreases in value if the price of the underlying security increases, the downside risk of writing the option is minimized. The most common example of this strategy is the use of a covered call on a stock already owned by an investor.
A trading strategy that involves buying a security and then writing a call option on it. For example, an investor buys 100 shares of stock at $20 a share and then sells call options on the shares with an exercise price of $25. If the price of the stock stays below $25 until the options mature, the investor keeps the premium and does not have to sell the shares. If the price goes above the exercise price, the investor will have to sell the shares at $25, but will still make $5 a share on the sale.
How to use Buy-write in a sentence?
- Selling a covered call is an example of a buy-write strategy.
- This strategy risk losing the position if the price of the underlying security rises too fast.
- Buy-write is an option strategy most often used on stocks.
- Buy-write strategies require a sound method for selecting the right strike price and expiration date to maximize gains.
Meaning of Buy-write & Buy-write Definition