Options for Volatile Markets: Managing Volatility and Protecting Against Catastrophic Risk, Second Edition

CHAPTER 3

The Basics of Covered Call Writing

Covered call writing—the basic practice of selling call options on one's stock holdings—is the grandfather of option strategies. It is a conservative, multipurpose strategy that effectively transfers some of the risk from holders of stocks to those looking to take on that risk with limited capital. It was the desire by institutions with large stock portfolios to hedge their holdings that provided the genesis of the options market in the United States. With a growing inventory of call option contracts offered by institutional clients, brokerage houses generated demand among public investors to purchase the contracts by advertising their availability in the newspaper. When it was clear that a formal, ...