Covered Calls

Covered Calls are generally considered one of the safest investment strategies around today – mainly because the position taken is ‘covered’ by equity assets in the form of stocks, rather than another derivative position. In fact, to quote the Chicago Board Options Exchange (CBOE) … “Writing covered calls is not only the safest of all option strategies, it is also safer than purchasing and selling stocks only”. However, from an investor point of view, if you own the underlying stock – even if the price action goes against you, you only lose when you sell a stock. You can choose to hold a stock for a long time until things get better, whereas option positions will eventually expire – and other derivative positions will only increase your losses by the leveraged amount.

The simple idea behind a covered call is that you sell (or ‘write’) call options against the stock that you already own. You would normally do so for a strike price above the price you bought them for. This way, if the calls are exercised, you will be forced to sell the stock for at least some gain. You will need to own at least enough of the stock to “cover” the number of shares involved in the option contract – usually 100 shares in the USA, or 1,000 shares in other countries like Australia.

If you buy shares and immediately sell call options over them all in the same transaction, this is called a “buy-write” trade.

The risk involved from selling option contracts is ‘covered’ by the shares that you can deliver to the market, if the options are exercised.

There is more to using Covered Calls than meets the eye, so in this section we will consider the following:

1. What is a Covered Call

2. Covered Call Strategy – for the stock owner who wants more than dividends

3. Covered Call Writing Strategy – for Compounding Monthly Income

3. Covered Calls and Naked Puts

4. Writing Covered Calls

5. Covered Call Investing

6. Covered Calls Picks

7. Covered Calls Options

7. Selling Covered Calls – in a Bear Market