One of the common equity/option combo trades is the Buy-Write. Here is a brief explanation courtesy of Investopedia:
I currently have this type of trade on with $SPXU – the ProShares Ultrapro Short S&P 500 ETF. I am long the ETF and short the May 10 strike Call on average of $.36 cents. The initial motivation of the trade was simply to capture the negative move in the S&P and to hedge current long positions.
There are several reasons to trade $SPXU but let me highlight a few key elements to it:
- This should only be traded short-term if just an equity position
- With my trade, my gain is capped at $10.36 (strike at $10 plus premium collected) and my downside is protected to $9.64.
By having the option premium as cushion, I can leave this position on to protect my other long positions that I have in my portfolio. This “hedge” gives me a $.72 cent range to let it gyrate within. The ideal outcome for me is a clost near $10 at expiration next Friday (May 18) thus keeping the premium collected.