17 Pages Posted: 4 Jun 2014 Last revised: 27 Jan 2017
Date Written: August 2, 2014
A covered call is a long position in a security and a short position in a call option on that security. Equity index covered calls are an attractive strategy to many investors because they have realized returns not much lower than those of the equity market but with much lower volatility. However, a number of myths about the strategy – from why it works to why an investor should or should not invest – have surfaced, and many of them are erroneously considered “common knowledge.” The authors review the underlying risk and returns of covered call strategies and dispel eight common myths about them.
Keywords: Covered Call, Covered Calls, Call Overwriting, Overwriting, Options, Volatility Risk Premium, Variance Risk Premium, BuyWrite, Buy-Write, PutWrite, Put-Write
JEL Classification: G00, G10, G11, G12, G13
Suggested Citation: Suggested Citation
Israelov, Roni and Nielsen, Lars N, Covered Call Strategies: One Fact and Eight Myths (August 2, 2014). Financial Analysts Journal, Vol. 70, No. 6, 2014. Available at SSRN: https://ssrn.com/abstract=2444993 or http://dx.doi.org/10.2139/ssrn.2444993