ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Generate Income by Writing Covered Options

Updated on March 17, 2019

Options Basics

Equity options are generally exchange traded instruments where the buyer pays a premium to the option writer. The option provides the buyer with the right to buy or sell a fixed number of shares at a set price on a set expiry date. The buyer is under no obligation to exercise the option and therefore would only do so when the price at expiry is favourable. The writer on the other hand has an obligation to settle if the option is exercised.

The Exchange will usually facilitate an options market for key stocks and indices.

A call option gives the buyer the right to buy the underlying stock. The writer is obliged to sell the stock at the strike price on exercise.

A put option gives the buyer the right to sell the underlying stock. The writer is obliged to buy the stock at the strike price on exercise.

Using options it is possible for traders to establish very large exposures at very little cost and is another method of gearing into a particular trade.

Fund managers will often use options to hedge the risk on their equity investments and in some cases to enhance portfolio income.

If you are not Covered you are Naked

A wise and not yet old man once told me that the fastest way to go broke was to write options.

Why? Because writing options leaves you open to risk. Potentially far more risk than an investment in shares. Or should I say an unleveraged investment in shares?

My wise friend was referring to naked options. A naked options position is where you have written an option and you do not own the underlying equities or cash to settle the exposure. Your exit strategy is to close out the open position either by buying back the options prior to expiry, if you are lucky by allowing the options to lapse worthless or by cash settling at expiry. Most exchanges that facilitate options trading enforce collateral requirements to protect against the risk of writers defaulting.

Simple Covered Strategies

Covered Call

A covered call is a call option written over stock that you own.


You own own 1000 shares in ABC company and want to generate some additional income. The current share price is $20 and you are happy to sell at $21. You write 10 options to sell 100 ABC company shares at $21 in one month time at 0.50c per share. You receive a premium of $500 less transaction costs immediately. If you are exercised you will sell your shares at $21.00 and realise a further profit on the share sale of $1000 less transaction costs.

If the ABC share price was to fall you might think of buying the options back as the option price would also be cheaper. This would leave you holding the stock unencumbered.


Recieving additional income in the form of options premium


You have no protection if the ABC share price falls.

If the ABC share price rallies beyond $21 you will either need to buy the options back at a higher price than what you sold them for or if exercised you will be obliged to sell at $21 when the market rate for ABC shares is higher.

Buy Write

A Buy Write is a covered call which is written at the same time you buy the stock. The premium received effectively reduces the initial outlay.


You wish to buy 1000 shares in ABC company currently priced at $20 and are happy to sell at $21 in a months time. You enter a buy-write deal where you pay $20 per share for the stock and recieve 0.50 per share for the option. Your effective cost is $19,500.00 plus transaction costs.


A cheaper net purchase price


The stock is held as collateral against the option position.

Your upside is limited to the strike price on the option

Cash Covered Put

An alternative to the Buy-Write is the cash covered put. This can be used as an alternative to leaving an order with your broker.


You are happy to buy 1000 ABC Company Shares at $19.00 and decide to write a put option with a $19 strike at 0.45c per share. You recieve a premium of $450.00 less costs immediately. If subsequently exercised you will pay $19000 plus costs for the shares.


you receive the premium immediately.


The ABC Company Share price may rally and you might not be able to buy the stock for the price you wanted to pay. 


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)