When to use Covered Call Writing

Covered call writing can be defined as a strategy which involves buying the underlying asset and writing a call on that asset. So for example if an investor purchases 100 shares of ABC Company at $100 and at the same time write a $120 call on 100 shares of ABC company and receives the premium of $10 then he get maximum benefit only if price is at $120 because beyond it he has to cover his call which he has sold at $120 and hence any rise above $120 will be not be beneficial for the investor.

This strategy will make sense to an investor who has belief that a stock has chances of small price appreciation and hence an investor will therefore buy the stock at the prevailing market price and write an out of money call, so if the price rises he will benefit from the price rise due to the ownership of stock and also he has taken the premium of $10 as in the above case but if price rises more than $120 then he will not benefit from it because of writing of call. In other words covered call writing is best suited for an investor if there is small price rise and not considerable price rise.

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