Options 101: Covered-Call Writing-Minyanville

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Options 101: Covered-Call Writing

Mark Wolfinger Mar 13, 2009 12:00 pm


		Reduce risk, increase profit.

An introduction strategy selection was recently posted in which I suggested a few of the methods I use. Call writing is covered at the top of the list.

When you write (sell) a call option, you accept the obligation to sell 100 shares at the option's strike price. You may never be required to sell those shares, but as long as that option is outstanding (you haven't repurchased it and it hasn't expired) that obligation remains intact.

When you are "covered" it means that you already own the shares that you're under obligation to sell. (If you don't own the shares, your option position is "naked," and if you must sell the shares, it would be a short sale.)

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Only the option owner has the right to decide if he/she wants to exercise the option to buy your shares. You, as the option writer, have no rights.

Warning

When investors first hear about the idea of covered calls, they're often surprised at how much "free" money there is to be made, and thus, are eager to adopt this investing method. It's not that easy to make money, and it certainly isn't "free." But, this method can be considerably less risky than owning stock outright - as in buy-and-hold. There's still risk of loss when the share price declines - and profits are limited (you cannot sell stock above the strike price). This strategy isn' suitable if you're someone who must achieve the best possible result with each investment because when the market surges, you may be dissatisfied with the profits.

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Comments (7)

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Mark Wolfinger

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03-13-2009, 4:10 pm
I would never suggest that anyone 'put it all' into stock. My UNSTATED assumption is that investors already know how much they want to invest in the stock market. Once that decision is made, I help them hedge those investmen Read More

Frank Mont

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03-13-2009, 7:18 pm
Perhaps I wasn't clear, I would not put it all into stock either, what I meant was that given an amount to invest in stock (a portion of a portfolio) an alternative would be invest say 95% of that amount in bonds and the remainder in LEAPS. Dep Read More

Mark Wolfinger

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03-14-2009, 11:24 am
Hi Frank, Yes, that's a different question. That idea does not work <i> for me</i> because I don't want to pay the time premium for owning options. But, if you are bullish and want to ta Read More

Frank Mont

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03-15-2009, 3:55 pm
Thinks for the reply. I have seen the strategy mentioned in several books and web sites but have not seen any detailed discussion of risk vs. rewards or past performance. While it seems like a simple idea there is a lot to consider such Read More

Mark Wolfinger

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03-15-2009, 9:03 pm
Frank, You are very welcome, In the end, your final analysis may still be necessary - unless you find someone's argument to be so persuasive that you decide to look no further. a) Bonds: I've never Read More


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