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Definition

Writing a call option against a long position in the underlying security. By receiving a premium, the writer intends to realize additional return on the underlying common stock or gain some element of protection (limited to the amount of the premium less transaction costs) from a decline in the value of that underlying stock. For example, if an institution such as a pension fund or insurance company owns a block of Anglo American shares and they believe that the share will generally fall over the next year they can sell call options to investors who believe that Anglos will appreciate during that period. In this way they can increase their return on their Anglo shares by the price of the call option less dealing costs. The risk is that they are wrong and the call is exercised.

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