Replies to post #108900 on Biotech Values

[iwfal]

But the other way of looking at it is that when you write a covered call, you have given up the upside in exchange for a premium but have retained the downside. Looked at that way, the analogy to flood insurance is not so far off the mark -- in both cases you get a premium and take the risk of loss.

A difference is that a writer of calls can still sell their underlying position for better than they could have if they hadn't written the calls (buy back the (cheaper) options, sell the stock same as they would have if they had never written calls). In contrast insurance underwriters would have to pay more to get out if the odds of a flood went up.

Ultimately the difference is that insurance underwriting is a volatility increasing operation (the insurance underwriter has no basic interest in owning land along the river so had no native exposure to the volatility), while writing call options is a volatility decreasing operation.