Alternatives to Covered Calls
Where should options investors start?
Professor Mark Wolfinger,
I was wondering what you thought of Steve Smith's article "The Truth About Covered Calls", which is basically blasting covered calls and recommending, instead, combining the following two techniques:
- Replace the underlying long stock with the purchase of an in-the-money Long-Term Equity Anticipation Security (LEAPS), or long-term call option.
- Rather then selling a single strike call, sell a vertical spread for a credit.
After reading your book Create Your Own Hedge Fund, I certainly will be sticking with your recommendation. Nothing like getting an instant discount when buying stock, especially when I have no ambitions to sell the ETF once purchased. Looking forward to studying it more in-depth and just ordered your other book, Rookie's Guide to Options, hope to enjoy it equally as well.
1. You will like the new book much more than you did Create Your Own Hedge Fund.
2. I'm pleased you like the covered call strategy, especially after living through the 2008 market debacle. In the Rookie's Guide (and throughout my blog, Options for Rookies), you'll find other strategies that are similar. The advantage to any of those alternatives is reduced risk. Yes, that comes with reduced reward potential, but that's where you get to decide which is better for you.
If you like the idea of being invested in the markets, writing covered calls will suit you nicely. If you prefer more protection -- call it insurance -- you may prefer collars, or its equivalent, selling out-of-the-money put spreads.
The strategy you asked about is worth considering. I'm not telling you that it's better because that is such a relative term, and better for me isn't necessarily better for you. There are advantages -- especially when you're very bullish, but there are disadvantages, such as less protection in a down market.
3. I agree with Smith that writing covered calls leaves much to be desired in the risk department.
But for investors (as opposed to traders looking for short-term profits) who plan to remain "long the market" all the time, I believe writing covered calls is a viable method.
Because I believe so strongly in the importance of risk management to long-term success as a trader, Smith's idea is very much worth discussing.
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