What Is a Buy-Write Strategy?
A buy-write is the simultaneous purchase of stock and sale of a covered call option in a single transaction. Rather than buying shares first and then selling a call separately, the buy-write combines both legs into one order, typically executed as a net debit. This ensures you enter both positions at the same time, eliminating the timing risk of buying shares today and selling a call tomorrow (during which the stock price may change unfavorably).
The buy-write is essentially a covered call that you initiate from scratch in one trade. Institutional investors and large portfolio managers frequently use buy-write orders because they guarantee simultaneous execution and often receive better fills than separate orders. Retail investors can also place buy-write orders through most major brokers, though the order type may be labeled as covered call or buy-write depending on the platform.
A buy-write means buying new shares AND selling a call at the same time. An overwrite means selling a call against shares you already own. The economics are similar, but buy-writes establish a new position while overwrites add income to an existing holding.
How to Calculate Buy-Write Returns
- 1Net debit = $100 - $3.50 = $96.50 per share
- 2Total capital = $96.50 × 200 = $19,300
- 3If called at $105: profit = ($105 - $96.50) × 200 = $1,700
- 4Return if called = $1,700 / $19,300 = 8.81%
- 5Annualized = 8.81% × (365/30) = 107.2%
- 6If stock stays at $100: static profit = ($100 - $96.50) × 200 = $700
- 7Static return = $700 / $19,300 = 3.63%
The CBOE BuyWrite Index (BXM)
The CBOE S&P 500 BuyWrite Index (BXM) is the benchmark for buy-write strategy performance. It tracks the returns of a strategy that buys the S&P 500 index and simultaneously sells at-the-money monthly covered calls. Since its inception, BXM has generated approximately 75-85% of the S&P 500 total return with approximately 30% less volatility. This demonstrates that the buy-write strategy delivers strong risk-adjusted returns, outperforming the S&P 500 on a Sharpe ratio basis in many periods.
| Metric | BXM (Buy-Write) | S&P 500 | Difference |
|---|---|---|---|
| Annualized Return | ~9% | ~11% | Buy-write trails by ~2% |
| Annual Volatility | ~10% | ~15% | Buy-write 33% less volatile |
| Max Drawdown | ~30% | ~50% | Buy-write draws down less |
| Sharpe Ratio | ~0.65 | ~0.55 | Buy-write is more efficient |
| Monthly Win Rate | ~65% | ~60% | Buy-write wins more often |
When to Use Buy-Write Orders
Buy-Write Best Practices
- Buy-write orders guarantee simultaneous execution of both legs
- Available on most major brokers (Fidelity, Schwab, IBKR, E*TRADE)
- Net debit = effective cost basis = stock price minus premium
- The CBOE BXM index demonstrates long-term buy-write viability
- Buy-writes are functionally identical to covered calls but executed differently
- Institutional investors use buy-writes to deploy capital efficiently
When placing a buy-write order, always use a net debit limit order. Calculate: Stock Ask Price - Call Bid Price = Maximum Net Debit. Set your limit at the mid-point or slightly worse than mid for better fill probability. Never use market orders on multi-leg options strategies.