Say that XYZ shares bounce around $50 for three months. They never top $55, so it never pays for the owner of the option to buy Carl’s shares. The call option expires unexercised.
Here, Carl’s $180 income from selling the call would be 1.8% of his $10,000 investment in XYZ. He’d also collect the quarterly dividend, which might be, say, 0.5%, if XYZ pays a 2% annualized dividend. That’s a 2.3% total return in a quarter of a year, or 9.2% annualized, while XYZ shares went nowhere. Going forward, with the option not exercised, Carl can write another call on the shares of XYZ he still owns.
This is a simplified, hypothetical example. Trading costs aren’t included, for one thing. Nevertheless, a “buy-write” strategy might produce desirable results if stocks are in a trading range.
Tomorrow: Up Market