A customer who is long 500 shares of xyz writes 7 calls against the position. this is an example of

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Business

Rene

16 May, 08:45

A customer who is long 500 shares of xyz writes 7 calls against the position. this is an example of

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Erika Cross · Answer 1

Answer: Covered Call

When a person holds a stock and writes (sells) calls on the same stock, the strategy is known as a covered call.

A person can opt for this strategy if he has a neutral view on the stock, but wants to generate an income stream by receiving premiums by writing the call option.

The risk involved in this strategy occurs when the stock price moves above the strike price. In this scenario, the covered call writer has to deliver the shares when the call is exercised. He doesn't benefit from an increase in price.