COVERED CALL/BUY WRITE | bull strategy

Example: Buy futures; sell calls
Market Outlook: Neutral to slightly bullish
Risk: Limited, but substantial (risk is from a fall in futures price)
Reward: Limited
Increase in Volatility: Hurts position
Time Erosion: Helps position
Break-Even Point (BEP): Starting futures price minus premium received

The covered call is a strategy in options trading whereby call options are written against a holding of the underlying security.

Using the covered call option strategy, the investor gets to earn a premium writing calls while at the same time appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares.

However, the profit potential of covered call writing is limited as the investor had, in return for thepremium, given up the chance to fully profit from a substantial rise in the price of the underlying asset.

Out-of-the-money Covered Call
This is a covered call strategy where the moderately bullish investor sells out-of-the-money callsagainst a holding of the underlying shares. The OTM covered call is a popular strategy as the investor gets to collect premium while being able to enjoy capital gains (albeit limited) if the underlying stock rallies.

As the covered call writer is exposed to substantial downside risk should the stock price of the underlying plunges, collars can be created to reduce this risk thru the use of put options.

In-the-money Covered Call Strategy

In-the-money covered call options are sold when the investor has a neutral to slightly bearish outlook towards the underlying security as their higher premiums provide greater downside protection.

Writing in-the-money calls is a good strategy to use if the options trader is looking to earn a consistent moderate rate of return.

Profit is limited to the premium earned as the writer of the call option will not be able to profit from a rise in the price of the underlying security.

Offers more downside protection as premiums collected are higher than writing out-of-the-money calls.

For a full list of strategies