BUY AND WRITE Meaning and
Definition
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Buy and write is an investment strategy in which an investor simultaneously purchases a particular security (usually stock or exchange-traded fund) and writes (sells) call options on that same security. It is a combination of buying and selling options in an effort to generate income and potentially mitigate risks associated with owning the underlying security.
When an investor employs the buy and write strategy, they first purchase a certain number of shares of a security they believe will appreciate in value. Simultaneously, they sell call options on those shares, typically at a strike price that they consider achievable over a specific period. By selling these options, the investor receives a premium, which adds to their investment income.
The primary goal of the buy and write strategy is to generate additional income through option premiums while still having exposure to potential capital appreciation of the underlying security. It is often used by long-term investors seeking to augment their returns or reduce the cost basis of holding a stock. Additionally, writing options can provide some downside protection as the premium received can offset potential losses if the stock's value declines.
Overall, the buy and write strategy offers a balanced approach, combining both stock ownership and option selling to potentially enhance investment returns and mitigate risks.
