A buy-write strategy, also referred to as a covered call, is an options trading approach in which an investor simultaneously purchases shares of an underlying stock and sells a call option on those same shares. This strategy is designed to generate “income” by collecting options premiums received from selling call options, while the owned shares serve as collateral, thereby limiting the risk associated with the short call position. The strategy is moderately bullish. It involves buying/owning the underlying shares. If one owns an asset, any rational investor would want the value of that asset to rise. But, by selling an upside call option, the investor will be obligated to sell the shares at the strike price if holders of those calls exercise them. So if an investor is bearish on an asset, a buy-write or covered call isn’t suitable. If an investor is wildly bullish on an asset, anticipates a large, sharp upward price movement in the near term, and seeks substantial capital gains, a buy-write or covered call may be a profitable strategy. However, it would likely be a suboptimal approach to affect an aggressively bullish investor’s thesis. Strategy mechanics To implement a buy-write: Acquire the underlying asset : Purchase at least 100 shares of the target stock (a standard options contract in the U.S. represents 100 shares). Sell a call option : Concurrently sell one call option contract with a strike price typically at or above the current stock price (often out-of-the-money to allow for some potential appreciation). The options premium collected represents the “income”. Monitor and manage : At expiration, if the stock price remains below the strike price, the call expires worthless, allowing the investor to retain the premium and the shares. If the stock price exceeds the strike, the shares may be assigned (called away) at the strike price, but the investor still keeps the premium and any capital gains up to that level. Of course, the investor may also manage the position prior to expiration. In certain circumstances, the short call option’s price may decline to a level where the investor can purchase it back at minimal cost, locking in a gain on the option and possibly adjusting or “rolling” to another strike or expiration to collect additional premium if desired. Bear in mind, though, that rolling a short call to a lower strike if and as a stock declines will cap potential gains if the stock rebounds, and an investor should weigh those tradeoffs carefully. The net effect is a reduction in the effective cost basis of the stock by the amount of the premium, potentially enhancing overall returns if the stock performs moderately well. Suitability and optimal conditions This strategy is most suitable for investors with a neutral to moderately bullish outlook on the underlying stock, particularly when they seek to augment income on a position they intend to hold in the near term. It is ideal in the following scenarios: Sideways or modestly rising markets : The strategy benefits from limited price appreciation, as the premium provides yield without requiring significant stock movement. High implied volatility environments : Elevated volatility increases call option premiums, thereby boosting income potential. Income-focused portfolios : It appeals to those prioritizing current yield over unlimited upside, such as in dividend stocks or stable blue-chip equities, where the investor is comfortable potentially selling the shares at a predetermined price. However, it caps potential gains if the stock surges significantly and exposes the position to downside risk equivalent to owning the stock outright (mitigated somewhat by the premium). It is less appropriate in strongly bullish markets, where forgoing upside may underperform a simple long stock position. There’s a tendency in articles like this for the author to propose a buy-write or covered call idea, only to shift to a catalyst-driven option strategy a few days later, followed by a hedging strategy. While there’s nothing wrong with implementing a variety of option strategies, and it’s important to recognize that each strategy has its time and place, one must remember that buy-writes/covered calls are an investment strategy intended to be implemented consistently, typically across a range of underlying assets over time, as long as the primary criteria are met. So consider these examples as merely the first step; continue to evaluate the underlying factors and options for suitability, and deploy the strategy consistently for optimal results. Good time/opportunity for buy-writes? We are in a bull market. The S & P 500 hit a new high on Monday. Financials are also doing well — XLF is trading well above the 20, 50, and 150-day moving averages. Because buy-writes/covered calls involve owning stock, that’s a good first step. So let’s take a look at the example below, using Netflix. The streaming giant posted solid results in the most recently reported quarter. The company boasts over 300 million subscribers globally, a number they hope to grow by more than 35% by the end of the decade. That’s ambitious but achievable, given the addressable market (TAM) is estimated at 750 million, excluding China. The company raised its revenue growth guidance from 13% year over year to 15% and improved its margin forecasts as well. Netflix is trading ~ 36.5x FY2026 adjusted earnings per share with an expected year on year growth rate of ~22.5%, a reasonable valuation if not an overwhelmingly cheap one. This supports a moderately bullish outlook, our first criterion, as does the fact that while the stock remains above the 200-day moving average, it is actually below the 50-day, and has underperformed the market since reaching an all-time high on June 30. A holder of the shares could sell the Oct. 31 expiration $1,285 calls for ~2.5% of the current stock price or nearly $30 per share. That’s not a bad yield over ~ 6½ weeks. Additionally, the $1,285 strike offers more than 8% of potential capital appreciation before the shares are potentially “called away.” Combined with the 2.5% in premiums collected, the maximum gain on the trade is greater than 10%. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
A ‘covered call’ options strategy for investors betting on future Netflix gainspickerwhel