Definition of "Buy And Write Strategy"

An options strategy whereby investors write (sell to open) covered call options on securities that they already own. To be considered covered, the number of option contracts may not exceed the equivalent number of shares held (1 contract normally equals 100 shares). If an investor owns 1000 shares of XYZ, for example, he may write up to 10 option call contracts on XYZ for it to be considered covered. The writer may receive both stock dividends from the underlying security and premium income from the call options. The inherent risk of this strategy is that the writer may have to sell their stock below the current market price if the call is exercised by the option buyer. For example, a writer sells a covered XYZ Nov 50 call and a buyer purchases XYZ Nov 50 calls. If the current market price is 53 when the buyer exercises the call options, the writer's stock is called away (sold) at 50--not 53.