What is Covered Call Writing?

Transcript

What is covered call writing?
Some investors focus on capital appreciation.
Others invest for dividend income.
Covered call writing is another investment approach that focuses on enhancing cash flows while reducing equity risk.
Put simply, covered call writing means you own an asset, like a concentrated stock or an ETF, and you sell the option to buy it to someone else.
In return, you receive a premium even if they never actually buy the asset.
Of course, there’s more to it than that.
Parametric has been managing options-based strategies for over three decades, including covered call writing, so we have deep expertise.
Let’s go over the process in more detail.
First, there’s an option seller who owns the asset.
In this scenario, that’s you.
The seller defines three key features of the option.
The amount of holdings included in the option.
The strike price, which is the price the underlying asset would reach before a buyer would typically purchase it.
And the maturity date is when the option will expire and can be a week to several years later.
The option buyer decides to purchase the option and pays the option premium to you.
This is compensation for selling the right to buy the asset to someone else and for the volatility risk that you face until the option expires.
The option buyer now has the right to buy the asset and may do so on or before the maturity date.
If the market price doesn’t reach the strike price, the option generally expires worthless.
You keep both the premium and the asset.
If the asset price hits the strike price or higher on or before the maturity date, the option may be exercised by the buyer.
If they exercise, you must sell them the defined number of shares at the strike price.
Options are a great way to address complex portfolio and investor objectives.
Covered call writing can be used by investors to generate extra income while waiting to reach a target sale price for their holdings.
It can be used to buffer a decline in asset value as the premium you collect can potentially enhance total returns.
Holders of concentrated stock may use call writing to diversify their holdings and boost their yield.
Making the most of call writing can be challenging.
Parametric Custom Call Writing follows a strategic, rules-based approach designed to seek predictable results while providing transparency and liquidity.
To help reduce risks and generate a greater total premium, the strategy staggers several covered calls with varying short maturities and strike prices.
Custom Call Writing portfolio positions are also monitored in real time to help minimize losses and maximize potential profits.
Parametric can even customize the call writing strategy for investors who have particular strategic needs.
And the firm will seek to buyback options for investors if selling shares is not desired.
It’s an approach optimized based on over 30 years of experience designing and managing custom options-based solutions.
Speak to your financial advisor to discuss how Parametric Custom Call Writing can help you achieve your investment goals.