An investor who buys or owns stock and writes call options in the equivalent amount can earn premium income without taking on additional risk. The premium received adds to the investor’s bottom line regardless of the outcome. It offers a small downside ‘cushion’ in the event the stock slides downward and can boost returns on the upside.
Predictably, this benefit comes at a cost. For as long as the short call position is open, the investor forfeits much of the stock’s profit potential. If the stock price rallies above the call’s strike price, the stock is increasingly likely to be called away. Since the possibility of assignment is central to this strategy, it makes more sense for investors who view the assignment as a positive outcome.
Because covered call writers can select their own exit price (i.e., strike plus premium received), an assignment can be seen as a success; after all, the target price was realized. This strategy becomes a convenient tool in equity allocation management.
The investor doesn’t have to sell an at-the-money call. Choosing between strike prices simply involves a tradeoff between priorities.
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