So I recently began an investment challenge in a mentorship program I am in, and I wanted to share what it was about and how the strategy works.
Facts:
- A buy-write strategy involves buying an equity, yet simultaneously selling a call against it
- A trader would employ this strategy when they are neutral to slightly bullish on the equity
- It is very important to use volatility to your advantage
- 1 option contract requires 100 shares of stock
- An option such as selling a call is a primary example of an investment derivative that provides asymmetric return for an investor, i.e. while it does cap the profit potential, it also serves to minimize potential losses (While having unlimited upside might sound very attractive, a sophisticated trader understands the importance of maximizing opportunities of high probability, lower-profit opportunities)
Context:
This competition should be really interesting considering the markets are still trying to adjust to the impact of COVID-19 on supply chains and global economies, as well as the Democratic primaries here domestically. I think the combination of these two serves to raise the implied volatility in the markets, and thus could provide an opportunity to sell calls.
How I am approaching this challenge:
One of the main rules of the competition is that we must write a call on 50-100% of our positions. For the sake of simplicity and consistency, I will write 100% of my shares. I think this could prove to be a valuable learning experience, and will update this post accordingly.
Update (7/30/20):
Thanks to the help of my peers and mentors, I was able to earn first place in the competition!
