Description
A Call option
is written against
a long stock position
in XYZ. The shares
can be purchased
either prior to
the Call being written
(A.K.A. - Overwriting)
or at the same time
the Call is written
(A.K.A. - A Buy
write).
When to use
Works well in
neutral to bullish
markets. Investor
must be willing
to sell XYZ at option's
strike price in
exchange for the
Call option premium
received. ITM and
ATM Calls are more
defensive positions.
OTM Calls are more
aggressive (bullish).
Risk/Reward
Characteristics
Profit potential
is limited as long
as the Call option
is written. Losses
are unlimited if
XYZ declines.
Break-even
Point: Purchase
price of XYZ stock
- premium received
for Call.
Time Decay:
Over time, the time
value portion of
the Call erodes
(i.e., decays).
At expiration, the
Call's value will
equal its intrinsic
value.
Volatility:
An increase in volatility
has a negative effect.
A decrease has a
positive effect.
The higher the option's
implied volatility
when written, the
greater the premium
received.
Assignment
Risk: The investor
must continuously
monitor XYZ for
possible assignment
of in-the-money
Call options prior
to their expiration.
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