What is 'Overwrite'

An overwrite is a type of covered-call strategy that consists of writing call options on stocks that the writer already owns to generate maximum current income from option premiums.

BREAKING DOWN 'Overwrite'

Overwriting allows an investor to use the stocks they own to write calls that can generate a profit. The overwrite strategy is a relatively simple strategy. It can be used by institutional or retail investors. Retail investors must have access to an options trading platform with margin available in order to write calls.

Overwrite Option Procedures

The writing of a covered, overwrite call option involves selling an option to buy a security that the writer or seller already owns. An investor may choose to sell a covered call option for various reasons with varying influences. When selling a covered call an investor can use the underlying security they own as collateral. In a naked call the investor would need to hold assets or have available margin to cover the delivery of the underlying security if exercised. Some investors may seek to write out of the money calls that expire worthless and require no delivery, providing a profit and only holding their margin until expiration. Overwrite strategies can obtain the same profit if the option is not exercised.

Overwrite Speculation

Overwrite option investors may choose to write calls with various profit payoffs. Some overwrite investors may choose to buy a stock with the intention of selling a call option while others may want to sell a call option on stock they are willing to bet.
 
Selling a call option gives the option holder the right but not the obligation to exercise the option and buy the stock from the writer at the strike price. Overwriters can choose various strike prices and expirations.
 
Payoffs for selling a call option include the immediate credit for the option sale and are known as net credit transactions since the writer is paid upfront. Some investors may want to write out of the money calls to profit from the option sale.
 
If an investor is bullish on the underlying stock they would want to write a call with a relatively high strike price that allows them to benefit from the option and only detracts a small amount at exercise from the transfer. Generally, an investor in an overwrite option will always seek to obtain the maximum value from the option, thus selling it at a higher price than they bought it for initially. Some investors who are bullish only in the short term may want to write a call to sell the stock at its, peak gaining both from the option premium and the sale profit.
 
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