Buy-Write Options Strategy: Your Simple Guide to Making Income While Owning Stocks

Ever wondered how to make extra cash from stocks you already own? The buy-write options strategy might be your answer. I’ve been using this technique for years, and it’s one of my favorite ways to boost returns in a sideways market.

What Is a Buy-Write Option Strategy?

A buy-write option strategy (also called a covered call) involves two simultaneous actions:

1. Purchasing a stock (or already owning it)
2. Selling (writing) a call option on that same stock

In simple terms, you’re buying shares of a company and immediately selling someone else the right to buy those shares from you at a specific price before a certain date. For giving them this right, they pay you a premium upfront – money that’s yours to keep no matter what happens.

How the Buy-Write Strategy Works

Let me break down this strategy using real-world terms:

When you implement a buy-write, you’re essentially doing two things at once:

• Buying shares of a stock (or using shares you already own)
• Immediately selling a call option against those shares

The call option gives someone else the right to purchase your shares at a predetermined price (strike price) before the option expires. In exchange for this right, they pay you an upfront premium.

The beauty of this strategy is that it generates immediate income through the premium you receive This income serves two purposes

1. It provides a small cushion against downside risk
2. It boosts your overall return on the stock

Why Investors Use Buy-Write Strategies

I’ve found several compelling reasons to use buy-write strategies in my portfolio:

• Income Generation: The option premium provides regular income, particularly helpful in flat markets
• Downside Protection: The premium received reduces your cost basis, offering a small buffer against losses
• Defined Exit Strategy: You essentially select your sell price ahead of time
• Enhanced Returns: Can boost performance on stocks you already plan to hold

The buy-write approach works best when you expect the stock to remain relatively stable or rise slightly. It’s not ideal for stocks you expect to skyrocket (since your gains would be capped) or plummet (since the premium only provides limited protection).

The Key Benefits of Buy-Write Options

When I first started using buy-write strategies, I was amazed by some of the advantages:

• Immediate Cash Flow: You collect the premium upfront
• Lower Risk: Compared to just holding the stock, you have some downside protection
• Flexible Strike Prices: You can choose higher strike prices to retain more upside potential
• Repeatable Strategy: You can continue writing new calls after expiration
• Portfolio Management Tool: Helps with strategic exits from positions

The Trade-Offs to Consider

Nothing is perfect, and buy-write strategies do come with some limitations:

• Limited Upside: If the stock price rises substantially above the strike price, you’ll miss out on those additional gains
• Still Exposed to Downside: The premium only provides partial protection against major drops
• Requires Monitoring: You need to track option expiration dates and stock movements
• Assignment Risk: The stock could be called away at any time if the option is in-the-money
• Tax Implications: Can create short-term capital gains depending on holding periods

Example of a Buy-Write Strategy in Action

Let’s look at how this works with a practical example

Imagine I purchase 100 shares of XYZ stock at $10 per share, costing me $1,000 total I believe XYZ is a good long-term investment but don’t expect it to rise dramatically in the near term

Simultaneously, I sell (write) 1 call option on XYZ with a $12.50 strike price that expires in 3 months. For this, I receive a premium of $0.50 per share, or $50 total (since each option contract represents 100 shares).

Here’s how different scenarios would play out:

Scenario 1: XYZ stays below $12.50 through expiration

• The option expires worthless
• I keep my 100 shares and the $50 premium
• I can write another call option if I wish

Scenario 2: XYZ rises to $13 by expiration

• The option will likely be exercised
• I sell my shares at the $12.50 strike price
• My total profit is: $250 from stock appreciation ($12.50 – $10 × 100) + $50 premium = $300
• I miss out on the additional $50 I could have made if I’d just held the stock ($13 – $12.50 × 100)

Scenario 3: XYZ falls to $9 by expiration

• The option expires worthless
• I keep my shares, which have decreased in value by $100
• The $50 premium offsets some of this loss, reducing my net loss to $50

Selecting the Right Strike Price and Expiration

The success of a buy-write strategy hinges on two critical choices:

Strike Price Selection

When selecting a strike price, you’re making a trade-off:

• Lower strike price: Higher premium but higher chance of having shares called away
• Higher strike price: Lower premium but greater upside potential if the stock rises

I usually look for strike prices 5-10% above the current stock price. This gives me some upside potential while still collecting a decent premium.

Expiration Date Considerations

The time until expiration also involves important trade-offs:

• Shorter expiration: Less time value but allows you to write options more frequently
• Longer expiration: Higher premium due to greater time value, but ties up your stock longer

I prefer expiration dates 30-45 days out, which balances premium income with flexibility.

Who Should Use Buy-Write Strategies?

This strategy isn’t for everyone. From my experience, buy-write options work best for:

• Investors who are neutral to slightly bullish on a stock
• Those seeking additional income from their portfolio
• Investors willing to sell their shares at the strike price
• People with enough shares to write covered calls (usually 100 shares minimum per contract)
• Those with sufficient knowledge about options trading

It’s probably not suitable for investors who:

• Are very bullish on a stock and want unlimited upside potential
• Don’t want to monitor their positions closely
• Are uncomfortable with the mechanics of options trading
• Hold stocks that are extremely volatile

Common Mistakes to Avoid with Buy-Write Strategies

Over the years, I’ve seen (and sometimes made) these common mistakes:

1. Writing calls on stocks you’re unwilling to sell – This leads to emotional decisions if the stock rises
2. Chasing high premiums – Usually means accepting more risk than you realize
3. Ignoring dividend dates – Options may be exercised early if dividends are pending
4. Not accounting for earnings announcements – Stock volatility typically increases around earnings
5. Setting strike prices too low – Increases income but also increases likelihood of assignment

How to Get Started with Buy-Write Options

If you’re new to this strategy, here’s how to get started:

1. Ensure you have options approval – Contact your broker to get approved for options trading
2. Select appropriate stocks – Look for stable companies you wouldn’t mind selling at a higher price
3. Start small – Try one or two contracts to learn the mechanics
4. Choose conservative parameters – Initially opt for out-of-the-money calls to reduce assignment risk
5. Track your results – Keep records of premiums received and overall performance

Buy-Write vs. Other Options Strategies

The buy-write (covered call) strategy is just one of many options strategies. Here’s how it compares to some others:

• Cash-Secured Put: Similar risk/reward profile but involves selling puts with cash set aside
• Naked Call: Much riskier since you don’t own the underlying stock (unlimited risk)
• Protective Put: Opposite approach where you buy puts to protect downside (costs money)
• Collar Strategy: Combines covered calls with protective puts for a range-bound position

The Bottom Line on Buy-Write Options

The buy-write strategy is a powerful tool that can help generate income and slightly reduce risk in your portfolio. It works best in sideways or slightly bullish markets and when you’re comfortable selling your shares at the strike price.

What I love most about this strategy is its simplicity compared to other options techniques. Buy a stock, sell a call against it, collect the premium. Rinse and repeat if the option expires worthless.

Remember that while the premium provides some downside protection, it doesn’t eliminate the risk of owning stocks. You should still perform thorough research on any stock before implementing this strategy.

Have you tried using buy-write options in your portfolio? I’d love to hear about your experiences in the comments!

FAQs About Buy-Write Options

Is a buy-write the same as a covered call?
Yes, these terms are used interchangeably. “Buy-write” typically refers to establishing both positions simultaneously, while “covered call” might refer to writing calls against stocks you already own.

How much money do I need to start using buy-write strategies?
You’ll need enough to purchase at least 100 shares of the underlying stock, as one options contract represents 100 shares.

Are buy-write strategies suitable for retirement accounts?
Yes, since covered calls have limited risk, most brokers allow them in retirement accounts like IRAs.

How do taxes work with buy-write strategies?
The premium is typically treated as short-term capital gain if the option expires worthless or as part of the sale proceeds if assigned. Consult with a tax professional for your specific situation.

Can I close a buy-write position before expiration?
Absolutely! You can buy back the call option at any time (potentially at a profit if the stock price falls) and either keep the stock or sell it.