What is a Buy-Write? Definition, Formula, and Example
A buy-write is an options strategy in which a trader buys shares of stock and simultaneously sells call options against those shares to collect premium.
Definition
A buy-write is an options strategy in which a trader purchases shares of stock and simultaneously sells an equal number of call options against those shares. The strategy collects premium from the short call in exchange for capping upside above the strike price. A buy-write is economically similar to a covered call, but the terms differ in execution timing: a covered call refers to selling calls against stock already owned, while a buy-write establishes the stock and option positions in the same transaction or as a single planned strategy.
How it is calculated
Maximum profit = (Call strike - Stock purchase price) + Option premium received
Maximum loss = Stock purchase price - Option premium received (stock can go to zero)
Breakeven = Stock purchase price - Option premium received
Return if assigned = Maximum profit / Stock purchase price
Worked example
[JPM] trades at $195. A trader buys 100 shares for $19,500 and sells one $200 call expiring in 45 days for $3.50, collecting $350.
Maximum profit = ($200 - $195) + $3.50 = $8.50 per share, or $850 per contract
Maximum loss = $195 - $3.50 = $191.50 per share if [JPM] goes to zero
Breakeven = $195 - $3.50 = $191.50
If [JPM] closes at $205 at expiration, the call is assigned and the stock is sold at $200. The trader keeps the $350 premium and realizes $5 per share of stock appreciation, for a total profit of $850. If [JPM] closes at $190, the call expires worthless and the trader holds the stock with an unrealized loss of $500, partially offset by the $350 premium.
When traders use it
Traders use buy-writes when they are bullish to neutral on a stock and want to generate income from option premium. The strategy is common in flat or slowly rising markets where upside is limited but the trader wants to reduce effective cost basis. Buy-writes are also used around earnings when option premium is elevated, though the risk of a large gap down remains. paper trading simulator
Limitations and common misconceptions
A buy-write does not protect against significant downside; the premium collected only offsets a small portion of stock losses. Upside is capped at the strike price, so the trader misses gains if the stock rallies sharply. Early assignment can occur before expiration, particularly if the call is deep in the money or a dividend is approaching. Traders sometimes confuse a buy-write with a covered call and assume the positions are identical, but the buy-write implies the stock purchase is part of the strategy rather than an existing holding.