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What is a Buy and Write Strategy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 July 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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The buy and write strategy is an example of a conservative options strategy that allows investors to write covered call options on the investments that are already part of the portfolio. The idea behind the buy and write approach is to create a situation in which the investor can realize stock dividends from the underlying stocks and securities, while also generating income from the call options.

Making use of a buy and write strategy requires a simple process. In order to prepare to sell to open contracts, the investor will normally use a formula that involves the inclusion of one hundred shares of the stock in one contract. Since the buy and write strategy demands that the investor will not create option contracts in which the cumulative number of shares exceeds the total shares that are owned. The investor will be limited in the number of contracts that can be written. As an example, if the investor owns a total of a thousand shares of a given stock, it would be possible to write a total of ten option call contracts involving a hundred shares in each contract.

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While the buy and write strategy has a great deal of potential to maximize the amount of income that is generated by stocks in then possession of the investor, there is a small element of risk. Essentially, the risk revolves around the stock price. Should an option buyer exercise the call on the stock, and the stock price on the option is lower than the current market value, the stock will be sold at the option price, not at the current market price. This will result in the investor losing money in the transaction. However, the potential for this type of situation can usually be avoided if the investor plays close attention to the trends in the market, and arranges the call options to allow for the possibility of this phenomenon.

Considered one of the more reliable conservative options strategies, the buy and write strategy is a process that can be utilized with a fair amount of regularity to maximize revenue from the investment portfolio. As with any type of investment approach, it is a good idea to research the performance of the stocks in question, and run a few scenarios before actually writing the call options.

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