Covered call writing can “beef up” income in your investment program, without interfering with your current investment goals. When you write a covered call option, you earn a premium, and in exchange, you must deliver the called stock shares if the option is assigned and your shares are called away. If you’d rather not let go of the stock, you can buy additional stock on the open market and deliver that stock instead. Usually the calls expire unassigned, affording you the opportunity to write another covered call and continue the income stream. The following are great reasons to engage in covered call writing.
1. EXTRA INCOME: Writing covered calls provide you with premium income, above and beyond dividends, even if the underlying stock remains static. This enhances your balance when the underlying stock pays no dividends.
2. RAPIDLY CREDITED TO CASH OR MARGIN ACCOUNTS: This premium income is credited to your existing account right away, for you to use as you wish.
3. EASY TO WRITE: Covered calls can be written online or by phone, because just like stocks they are traded on an exchange.
4. CONTINUED CASH DIVIDEND: On dividend paying stocks, you continue to receive dividends on covered call options until the stock is actually sold.
5. INSURANCE PROTECTION: Writing covered call options reduce investment risk, because the monthly premiums offset any decline in stock value. It is simply downside insurance.
6. PLAN AHEAD BY KNOWING YOUR RETURN: You know up front what your income will be, because you know the price of the call and the price you will receive if the stock is called (sold by exercise of the option). Low volatility stock offers a low risk call writing situation. Higher volatility options may pay more premiums, but your chances of being called are greater.
7. BROAD WRITING OPPORTUNITIES: Buy what meets your personal investment objectives. Diversify by writing covered calls on either dividend paying stock, or low volatility growth stocks that appreciate.
8. CHOICE OF EXPIRATION DATES AND EXERCISE PRICES: Expiration dates and exercise prices can be tailored to your personal taste. The lower the exercise price the less chance the stock will be called. Your expiration date can be one, two or three months out. The options are priced accordingly.
9. LONG TERM OPTIONS: For low maintenance long term call writing, select “LEAPS.” They are Long-term Equity Anticipation Securities with expirations up to three years out.
10. BUY-WRITE TRANSACTIONS: Simultaneously buy stock and write the covered call. This single transaction is not only convenient but you attract fairer prices from the market.
Mc Millan, Lawrence. McMillan on Options, Jon Wiley and Sons, Inc. New York, New York, 1996.
Lyons, Allan. Winning in the Options Market, Probus Publishing Company, Chicago, Illinois,