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Most frequently, the sale of stock index or common stock call options against a fixed common stock portfolio with the stated expectation that the options, on average, will expire worthless or be repurchased at a profit. Call overwriting strategies are frequently complex and may involve repurchasing unprofitable options and selling a larger number of options at a higher strike price in an attempt to turn losses into profits. Investor experience with overwriting strategies has been uneven. In general, overwriting adds modestly to returns in most periods with an occasional dramatic actual or opportunity loss in a bull market. Theory predicts that overwriting will reduce variance rather than enhance return, contrary to the statements of many overwriting advocates. Consequently, overwriters should not expect to improve their long-term risk- adjusted returns unless their strategies rely on finding price anomalies. This conclusion is complicated slightly by the fact that the option seller is selling convexity and will, consequently, have a different return pattern. Also called Overriding. See also Dynamic Overwriting.
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