What is the Buy-Write? Definition, Formula, and Example
A buy-write is an options strategy where a trader simultaneously buys shares of a stock and sells call options against those shares to generate premium income.
What is the Buy-Write?
A buy-write is a single combined trade where an investor buys 100 shares of an underlying stock and simultaneously sells one call option contract against those newly acquired shares. The strategy is functionally identical to a covered call, but the term "buy-write" specifically refers to the simultaneous execution of both legs as a single ticket. Traders use the buy-write to lower their effective cost basis on the stock purchase and generate immediate option premium income, accepting the trade-off of capping their upside potential if the stock rallies past the short call's strike price.
How the Buy-Write is Structured
The buy-write consists of two simultaneous transactions executed at the same time:
1. Buy 100 shares of the underlying stock at the current market price ($S_0$).
2. Sell 1 call option at a chosen strike price ($K$) with an expiration date $T$, collecting the premium ($C$).
The effective cost basis of the stock position becomes:
Cost Basis = $S_0 - C$
The maximum profit occurs if the stock closes at or above the strike price $K$ at expiration. The maximum profit formula is:
Max Profit = ($K - S_0$) + $C$
The maximum loss occurs if the stock goes to zero, mitigated only by the premium received:
Max Loss = $S_0 - C$
The breakeven point for the trade is:
Breakeven = $S_0 - C$
Worked Example
Assume AAPL is trading at $190.00. A trader executes a buy-write by buying 100 shares for $19,000 and simultaneously selling one 30-day $200.00 call option for a premium of $3.50 ($350 total).
- Cost Basis: $190.00 - $3.50 = $186.50
- Breakeven: $186.50
- Max Profit: ($200 - $190) + $3.50 = $13.50 per share ($1,350 total)
- Max Loss: $190 - $3.50 = $186.50 per share ($18,650 total)
If AAPL closes at $205 at expiration, the shares are called away at $200. The trader makes the full $1,350 max profit. If AAPL closes at $185, the call expires worthless and the trader holds the shares with an unrealized loss of $150 ($18,650 value vs $19,000 cost).
When Traders Use the Buy-Write
Traders deploy the buy-write when they are moderately bullish on a stock but expect it to trade sideways or face resistance at a specific price level over the near term. It is a core income-generation strategy favored by retail options sellers operating in low-volatility environments. Institutional traders also execute buy-writes on equities to enhance portfolio yield, and the strategy is the underlying mechanism for the Cboe S&P 500 BuyWrite Index (BXM), which tracks a systematic buy-write strategy on the S&P 500.
Limitations and Common Misconceptions
The primary limitation of a buy-write is the asymmetric risk-reward profile. The upside is strictly capped at the strike price of the short call, while the downside remains tied to the full notional value of the underlying shares. A common misconception is that the premium collected provides a substantial hedge against a market crash; in reality, the premium only offsets a fractional percentage of a major downward move. Additionally, if the stock pays a dividend and the short call is in-the-money, the trader risks early assignment, which strips away the dividend and forces the sale of the underlying shares before the intended expiration date.