covered call option writing
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covered call option writing Hi Mark, New to this area, in a article you wrote about covered calls, you cautioned the reader that there was increased risk if the price of the stock went down. If I own 100 shares of XYZ and I write a covered call, if the stock price goes down, what is my increased risk? I am looking at not so volitle dividend paying stocks that I could write a covered call on and boost the returns a little. The increased returns over time could allow me to increase the postion of XYZ and then add more shares to write more options. I am thinking along the lines of Blue Chips. Does this strategy make sense to you over a long period of time. I am looking at safely boosting the percentage. If I set the strike price approx 15-20% above. I would not cry if my stock got called. I would bank the returns and find another candidate maybe. If I didn't get called, I can build out the position collecting more dividends along the way. Is there something other than the risk of having the stock called away that I am missing? Jay Hello Jay, You are not missing anything, but there are some details to mention. Some of the other risks associated with writing covered calls do not apply to you. If you lose the stock, that's okay. There's the chance of missing a dividend, but that only happens if the option is going to be exercised by its owner anyway. This method is fine for you - as long as you understand that's it's a bullish strategy. There is no increased risk to the downside when you write covered calls (in fact, the risk is decreased). But there is risk. All I meant to say was that writing a covered call provides some protection against loss, but usually not too much. Thus, the investor can lose money when the stock dives. Yes, writing covered calls against a portfolio of blue chip stocks makes sense. But you already know that these stocks tend to be non-volatile, making their option premiums fairly low. If you choose a strike price 15 to 20% above the current price, is the premium high enough to write? I'm not suggesting it isn't because there is no minimum amount that a covered call writer must accept. But, each of us has his/her individual comfort zone. Speaking for me and my zone, I don't want to collect a 20-cent premium on a $50 stock. But for you - it can be looked upon as an extra dividend (it's not taxed as a dividend) and definitely worthwhile. -- Mark D. Wolfinger The Rookie's Guide to Options: The Beginner's Handbook of Trading Equity Options website: http://www.mdwoptions.com blog: http://blog.mdwoptions.com/options_for_rookies Free eBook: http://www.mdwoptions.com/freebook.pdf |
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