Revamping mediocre buy-write strategies
by Jerry Kopf
Stockbrokers usually introduce the average retail investor to option trading with a simplistic buy-write I
strategy. Buy the stock and sell (write) a call option against it. The mechanics are straightforward. The
seller or writer of the call option is establishing a contract with the purchaser of the call, promising to
deliver shares of a stock at a certain price (the strike price) on a certain date (expiration date). The buyer
pays the seller of the contract a fee (called the premium) to assume this risk. At expiration, if the stock is
below the strike price, the seller of the call keeps the entire premium. However if the price of the stock
moves above the strike price the seller has to deliver the stock to the buyer at the strike price.
In a market that stays in a trading range, the buy-write delivers decent results. Stockbrokers embrace it
because it's easy for customers to understand and therefore simple to "sell." It generates multiple
commissionsócommissions on both buying stock and simultaneously selling the call option.