This is an option strategy that attempts to create extra income by selling call options against a long stock position. The strategy is also referred to as a "covered call". A trader who holds a long stock position will sell call option contracts in a quantity that equals that stock position in order to collect the premium from the options.
The benefit of this strategy is that the trader will earn extra income from selling the call options in cases where the stock price finishes below the specified strike. If the stock price drops from its current value, the call premium serves as a cushion to downside losses. If the stock remains unchanged or trades up slightly, the option premium serves as extra income to the stock position.
The downside would be if the stock experiences a significant move to the upside (higher than the strike price and premium procured). The opportunity gains would be lost because those options would be exercised at the call strike price.
Take a look at the example below, where we assume a trader has established a long stock position in Apple [AAPL] for 100 shares at $112.50. If the trader sells 1 call option contract for 100 shares on the 114 strike, the payout is shown. There is still risk to the downside, and upside potential is capped, but for small moves in the near term, this strategy is buoyed by extra income gained from selling the options.
You can view diagrams like these by checking out the Strategy Payout page for each symbol. For example, here's the link to Apple's: AAPL Strategy Payout
MarketChameleon.com offers a tool called the Buy-Writes Search that shows the potential income generated from this strategy for popular stocks and stocks of the investor’s choosing.
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