Buy-Write Strategy

A buy-write strategy is an options approach where you simultaneously buy shares of stock and sell a call option against those same shares, collecting the option premium as income. The premium you receive reduces your effective cost basis on the stock and provides a small cushion against a price decline. If the stock rises above the call's strike price at expiration, you are required to sell your shares at that price. This is also called a covered call strategy; the terms are interchangeable, though buy-write specifically refers to entering both positions at the same time.

Think of it like renting out a parking space you own: you still own the land, you collect income each month, but if the tenant decides to buy it at the agreed price, you have to sell.

The CBOE BXM Index Tracks This Strategy's Historical Performance

The Chicago Board Options Exchange maintains the BXM Index, which measures a hypothetical buy-write on the S&P 500. It buys the index and writes at-the-money monthly calls against it. Over long periods, the BXM has produced returns similar to the broader market but with meaningfully lower volatility, illustrating that premium income from selling calls reduces both upside and downside swings in exchange for consistent income.

Strike Price Selection Sets Your Risk-Reward Tradeoff

You have three basic choices when selecting a call strike to write against your stock position.

• Out-of-the-money calls. Strike above the current stock price. You collect a smaller premium but retain more upside if the stock rises. Suitable for moderately bullish investors who want income without completely capping gains.
• At-the-money calls. Strike equal to the current price. You maximize premium income but cap any stock appreciation immediately above the entry price. Suitable for a neutral outlook.
• In-the-money calls. Strike below the current price. You collect the highest premium and get the most downside protection, but you are almost certain to be forced to sell your shares.

This Strategy Is Not Appropriate for Very Bearish or Very Bullish Views

If you are very bearish, the premium you collect does not come close to offsetting a large stock decline. If you are very bullish, selling a call caps precisely the upside you expect to capture. Buy-write strategies are designed for a neutral to slightly bullish view over a specific time period, where income generation matters more than maximum capital appreciation.

Buy-write ETFs apply this strategy at the portfolio level, holding diversified equity positions and selling calls against them, then distributing the premiums as income to shareholders. These funds provide access to the strategy without requiring you to manage individual covered call positions across many holdings.

Sources:
https://www.optionseducation.org/strategies/all-strategies/covered-call-buy-write
https://www.fidelity.com/learning-center/smart-money/covered-call
https://www.schwab.com/learn/story/options-trading-basics-covered-call-strategy
https://madisonfunds.com/resources/insights/covered-calls-an-equity-strategy-for-enhanced-income/