Variations Covered calls are being written against stock that is already in the portfolio. However, the further out-of-the-money call would generate less premium income, which means there would Buy write strategy a smaller downside cushion in case of a stock decline. The strategy nets the maximum gains and leaves the investor free to participate in the stock's future growth.
If it is not, the investor is free to sell the stock or redo the covered call strategy. Selling a covered call is an example of a buy-write strategy. OTM writing works quite well on down-day covered call writes discussed belowin which we write the stock on a day when both stock and the overall market are down.
Motivation The primary motive is to earn premium income, which has the effect of boosting overall returns on the stock and providing a measure of downside protection. The purpose is to generate income from option premiums.
However, considering that the long stock position covers the short call position, assignment would not trigger losses, so a greater chance of assignment should not matter. Max Gain The maximum gains on the strategy are limited.
Therefore the OTM write should not be a routine or automatic choice for the call writer, as so many writings on the subject of covered calls would urge. This strategy can be periodically repeated to increase returns during a time when the movement of the security is lackluster.
Assume the stock and option positions were acquired simultaneously. The most common example of this strategy is the use of a covered call on a stock already owned by an investor.
It requires vigilance, quick action, and might cost extra to buy the call back especially if the stock is climbing fast.