Covered-call buy-write
OptionsIntermediate
A buy-write holds the underlying and sells a call against it. The call premium cushions a decline and caps the upside. Cboe's S&P 500 BuyWrite Index is the standard illustration: a long S&P 500 position and a succession of one-month at-the-money calls. It is an options-income overlay, not a bond substitute.
Not investment advice. Nothing here is a recommendation to buy or sell anything. Backtests and historical studies are not guarantees, and a rule that worked in one sample can fail in the next. Trading can lose money. Links are for education, not endorsements. Do your own research.
- Rules
- Hold shares or a futures equivalent. Sell a call about one month out, at the money in the BXM-style version, and let it expire or settle. Then sell the next call. Do not sell a call against shares you are unwilling to have called away. Size the stock position first. The premium does not set the position size.
- Where AI fits
- AI can track the covered quantity so a sold call is never naked relative to the shares, and it can warn when a roll would sell a strike through an ex-dividend or an event. It can explain the index methodology. It should not promise that the premium is 'yield.'
- Markets
- Index options in the benchmark version. Single-stock covered calls are the same structure with earnings and early-exercise risk.
- Timeframes
- Monthly option cycle in the classic index version.
- Risks
- The upside is capped in a rally, and the downside is still the downside of the underlying minus a finite premium. Early assignment, dividends, and gap opens change the payoff. Selling calls on a position you cannot hold through a drawdown is not the strategy. Past index paths are not expected returns.