38 lines
1.9 KiB
Plaintext
38 lines
1.9 KiB
Plaintext
42
|
||
FIGURE 2-1.
|
||
XYZ covered write.
|
||
C +$500
|
||
0
|
||
e ·a.
|
||
i.ti
|
||
cii en $0 en 0
|
||
...J
|
||
0
|
||
~ a.
|
||
Part II: Call Option Strategies
|
||
Maximum Profit Range
|
||
50 55 60
|
||
"-. Downside Risk
|
||
Stock Price at Expiration
|
||
COVERED WRITING PHILOSOPHY
|
||
The primary objective of covered writing, for most investors, is increased income
|
||
through stock ownership. An ever-increasing number of private and institutional
|
||
investors are writing call options against the stocks that they own. The facts that the
|
||
option premium acts as a partial compensation for a decline in price by the underly
|
||
ing stock, and that the premium represents an increase in income to the stockhold
|
||
er, are evident. The strategy of owning the stock and writing the call will outperform
|
||
outright stock ownership if the stock falls, remains the same, or even rises slightly. In
|
||
fact, the only time that the outright owner of the stock will outperform a covered
|
||
writer is if the stock increases in price by a relatively substantial amount during the
|
||
life of the call. Moreover, if one consistently writes call options against his stock, his
|
||
portfolio will show less variability of results from quarter to quarter. The total posi
|
||
tion - long stock and short option - has less volatility than the stock alone, so on a
|
||
quarter-by-quarter basis, results will be closer to average than they would be with
|
||
normal stock ownership. This is an attractive feature, especially for portfolio man
|
||
agers.
|
||
However, one should not assume that covered writing will outperform stock
|
||
ownership. Stocks sometimes tend to make most of their gains in large spurts. A cov
|
||
ered writer will not participate in moves such as that. The long-term gains that are
|
||
quoted for holding stocks include periods of large gains and sometimes periods of
|
||
large losses as well. The covered writer will not participate in the largest of those
|
||
gains, since his profit potential is limited. |