What Is Covered Stock Strategy?

A covered stock strategy consists of writing a call or put that is covered by an equivalent long/short stock position.

Buy-Write

A buy-write strategy consists of writing a call that is covered by an equivalent long stock position (Long Stock + Short Call). It is a strategy when you expect the stock price to be neutral or slightly bullish in a short-term period. Using the buy-write strategy, you can earn a premium from writing calls while at the same time appreciate all benefits of underlying stock ownership. However, it also limits the profit potential of a long stock position while the risk is still substantial if the stock price declines.

Covered Put

A covered put strategy consists of writing a put that is covered by an equivalent short stock position (Short Stock + Short Put). It is a strategy when you expect the stock price to be neutral or slightly bearish in a short-term period. Using the covered put strategy, you can earn a premium from writing puts while holding a short stock position. However, it also limits the profit potential of a short stock position while the risk is still substantial if the stock price goes up.

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