Overwriting: Definition, How It Works, and an Example

What is overwriting?

Overwriting is an options strategy in which an investor who owns a stock sells (writes) call options against that stock to collect option premiums. The seller generally believes the options are overpriced or unlikely to be exercised before expiration and uses the premiums to generate extra income.

Key takeaways

• Overwriting generates additional income by collecting option premiums on stocks you own.
• It’s commonly used on dividend-paying stocks to boost yield.
• The strategy caps upside potential and carries assignment risk; it’s best for investors who understand options.

How overwriting works

• When you sell a call option, you receive a premium and take on the obligation to sell your shares at the option’s strike price if the buyer exercises the option.
• If the option expires worthless (stock stays below the strike for a call), you keep the premium and retain the shares.
• If the stock rises above the strike, you may be assigned and must sell your shares at the strike price—your upside beyond that price is foregone, though you keep the premium.
• Overwriting is often attractive after sharp stock declines, when option premiums are elevated; the larger premium can help offset further downside.
• Sellers can close the position by buying back the option, but that may require paying more than the premium originally received.

Benefits

• Generates extra income on top of dividends and potential capital gains.
• Provides partial downside protection equal to the premium received.
• Can improve effective yield on dividend-paying holdings.

Risks and drawbacks

• Upside is limited: large price appreciation in the underlying stock results in forgone gains above the strike price.
• Assignment risk: shares can be called away before/or at ex-dividend dates, possibly affecting dividend capture.
• If the stock rallies sharply, buying back the short option to retain shares can be costly.
• Strategy requires solid knowledge of options mechanics and active monitoring.

Example

An investor owns a stock currently trading at $50. They sell a three-month call with a $60 strike for a $5 premium.
* If the stock stays below $60 until expiration: the call expires worthless, the seller keeps the $5 premium and retains the stock.
* If the stock rises above $60 and the call is exercised: the shares are sold at $60. The seller’s total gain per share is $10 (capital gain from $50 to $60) + $5 premium = $15. Any upside above $60 is forfeited.
* If the stock falls to $45: the unrealized loss is $5, but the $5 premium offsets that loss (break-even in this simplified scenario).

When to consider overwriting

• You expect limited near-term upside but want income from a stock you plan to hold.
• You want to enhance yield on dividend-paying stocks.
• You are comfortable potentially having your shares called away.

Conclusion

Overwriting can be an effective income-enhancement technique when used appropriately, but it reduces upside and carries assignment risk. It’s best suited to investors familiar with options who have a clear plan for managing assignments and repositioning if the market moves against them.