A Buy-Write strategy involves buying a security, such as a stock or ETF, and immediately writing (selling to open) a covered-call option against it. This strategy lowers the initial price of the security immediately by capturing an income premium at the time of purchase.
Are There Different Types Of Buy-Writes?
Yes, depending on the strike price you chose. A buy-write is executed at the time of purchase, but there is an option of picking a strike price: In The Money (ITM), At The Money (ATM), or Out Of The Money (OTM).
With an In The Money (ITM) buy-write, you sell a covered call on the stocks or ETFs you purchased, and your strike price is lower than the purchase prices, your cost, and the security, stock, or ETF.
With an At The Money (ATM) buy-write, you sell a covered call on the stocks or ETFs you purchased. Your strike price is the purchase price, your cost, of the security, stock, or ETF.
With Out Of The Money (OTM) buy-write, you sell a covered call on the stocks or ETFs you purchased, and your strike price is above the purchase prices and cost of the security, stock, or ETF.
Differences Between Buy-Write And Covered Call?
Covered Calls are a multi-step strategy in which you already own the securities(stocks/ETFs) and want to generate additional income by writing covered call options and selling CCs against your stocks.
If this is selling off a covered call at the same time you purchase your stocks, a single event, it’s a Buy-Write. If you already own stocks/ETFs and later want to sell covered call options, it’s just a covered call.
If the variables are the same, the strategic shares have similar risks and returns; the difference is the timing of the option writing.
Benefits Of A Buy-Write?
The best benefit I see is that you can purchase your initial stocks/ETFs at a lower cost. The initial premium you get from selling, “writing,” that covered call option offsets the cost of “buying” your stocks/ETFs.
Disadvantages Of A Buy-Write?
You can have your stocks called away. Depending on whether you wrote a CALL out of the money, at the money, or in the money, you are on the hook for selling those stocks at cost, below cost, or above cost.
These strategies have risks and benefits; do your research and find what works for you.
Do You Use Buy-Writes?
Since a buy-write is characterized by the timing of buying stock and selling a covered call, I do not do so now. Most of my stock purchases at this time are assignments from the Wheel Strategy.
Also, if I’m not using a Wheel strategy and want a lower-priced stock, I sell PUT options on the stock/ETF at the purchase price I want and collect a premium while waiting.
So timing is an issue when defining a Buy-Write.
FYI About Me And Doing My First Buy-Write.
I am collecting cash and putting it on the side, waiting for a good dividend stock to start declining. When the prices are more reasonable, I plan to buy and simultaneously sell a covered call against it, a Buy-Write.
My plan for this little experiment is to sell it as an ATM LEAP option, say 12 months or one year.
I buy the stock, sell the LEAP Covered-CALL option, collect the premium immediately, collect a year of dividends, and then get my initial money back.
I can only do this experiment with the money I determine I will not need for 12 months, and with some premiums and high-dividend stocks, the returns will grossly exceed the turns I am doing with my T-Bill Ladders.
If you have feedback about this idea, please comment. Please read up later when I write about my Buy-Write experience.
 Myself with an interesting Bull Sculpture. Notice: No Lambo’s. :/ | Hi I’m Tom, A Blogger And A PIG Farmer. PIG Farmer as in I grow Passive Income Generators(PIG’s). I’ve been playing with stocks, mutual funds, and options for decades, as well as always working on my side hustle stacks. Unlike what you read online, I’ve yet to find a way to get rich quickly. Get Rich Quick isn’t happening for me. My journey has been long and continues. I hope to have so many PIGs I can stop working at my current job and volunteer as a medical worker overseas. Still waiting, but getting there. I still am a family man, and while on this Journey of Growing PIGs. I wanted to share my adventures(ups and downs), hoping you will contribute with your feedback and comments. Fun Fact: In my spare time, I am a Band-Dad! |