The covered-call options strategy allows an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just bank on income generation from the option premium.

In a flat market condition, the trader would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options.

However, the strategy can cap the upside of a potential rally – the trader keeps the premium generated but any gains beyond the strike price will not be realized. Consequently, during the easy-money fueled stock market rally, the buy-write strategy has underperformed the S&P 500. [Buy-Write ETF Strategy for Better Risk-Adjusted Returns]

For more information on the covered call strategy, visit our buywrite category.

Max Chen contributed to this article.