Buy-Write¶
OVERVIEW¶
A buy-write is a single combined trade where an investor buys 100 shares of an underlying stock and simultaneously sells one call option contract against those newly acquired shares. The strategy is functionally identical to a covered call, but the term "buy-write" specifically refers to the simultaneous execution of both legs as a single ticket.
Note
The buy-write lowers the effective cost basis on the stock purchase and generates immediate option premium income. The trade-off is a capped upside if the stock rallies past the short call's strike price.
STRUCTURE¶
The buy-write consists of two simultaneous transactions executed on a single order ticket:
- Buy 100 shares of the underlying stock at the current market price ($S_0$).
- Sell 1 call option at a chosen strike price ($K$) with expiration date $T$, collecting premium ($C$).
Key Formulas¶
| Metric | Formula |
|---|---|
| Cost Basis | $S_0 - C$ |
| Breakeven | $S_0 - C$ |
| Max Profit | $(K - S_0) + C$ |
| Max Loss | $S_0 - C$ |
Tip
Max profit is realized when the stock closes at or above the strike price $K$ at expiration. Max loss is mitigated only by the premium received and occurs if the stock falls to zero.
WORKED EXAMPLE¶
Underlying: AAPL at $190.00 Setup: Buy 100 shares at $190.00 · Sell one 30-day $200.00 call at $3.50 premium ($350 total)
| Metric | Calculation | Result |
|---|---|---|
| Cost Basis | $190.00 − $3.50 | $186.50 per share |
| Breakeven | $190.00 − $3.50 | $186.50 per share |
| Max Profit | ($200 − $190) + $3.50 | $13.50 per share / $1,350 total |
| Max Loss | $190.00 − $3.50 | $186.50 per share / $18,650 total |
Scenario A — AAPL closes at $205: Shares are called away at $200. Trader captures the full $1,350 max profit.
Scenario B — AAPL closes at $185: Call expires worthless. Trader holds shares with an unrealized loss of $150 ($18,650 value vs. $19,000 cost basis).
WHEN TO USE¶
Deploy the buy-write under the following market conditions:
| Condition | Applicability |
|---|---|
| Moderately bullish outlook | ✅ Primary use case |
| Stock expected to trade sideways | ✅ Ideal for premium capture |
| Stock faces overhead resistance | ✅ Strike placed at resistance level |
| Strong directional upside expected | ❌ Upside is capped at strike |
| Bearish outlook | ❌ Premium provides insufficient downside protection |
Note
The buy-write is the underlying mechanism for the Cboe S&P 500 BuyWrite Index (BXM), which tracks a systematic buy-write strategy applied to the S&P 500. Institutional traders use it to enhance portfolio yield on equity positions.
LIMITATIONS¶
| Limitation | Detail |
|---|---|
| Capped upside | Profit is strictly limited to the short call's strike price regardless of how far the stock rallies |
| Asymmetric risk-reward | Downside remains tied to the full notional value of the underlying shares |
| Limited crash protection | Premium collected offsets only a fractional percentage of a major downward move |
| Early assignment risk | If the short call is in-the-money and a dividend is pending, early assignment can strip the dividend and force an unwanted share sale before expiration |
Note
A common misconception is that the collected premium provides a meaningful hedge against a market crash. In practice, it reduces cost basis marginally and does not protect against large adverse moves.