35 lines
2.7 KiB
Plaintext
35 lines
2.7 KiB
Plaintext
70 Part II: Call Option Strategies
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third of the position against near-term calls, one-third against middle-term calls, and
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the remaining third against long-term calls - one can gain several benefits. First, all
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of one's positions need not be adjusted at the same time. This includes either having
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the stock called away or buying back one written call and selling another. Moreover,
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one is not subject only to the level of option premiums that exist at the time one
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series of calls expires. For example, if one writes only 9-month calls and then rolls
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them over when they expire, he may unnecessarily be subjecting himself to the
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potential of lower returns. If option premium levels happen to be low when it is time
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for this 9-month call writer to sell more calls, he will be establishing a less-than-opti
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mum write for up to 9 months. By spreading his writing out over time, he would, at
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worst, be subjecting only one-third of his holding to the low-premium write.
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Hopefully, premiums would expand before the next eXpiration 3 months later, and he
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would then be getting a relatively better premium on the next third of his portfolio.
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There is an important aside here: The individual or relatively small investor who
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owns only enough stock to write one series of options should generally not write the
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longest-term calls for this very reason. He may not be obtaining a particularly attrac
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tive level of premiums, but may feel he is forced to retain the position until expira
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tion. Thus, he could be in a relatively poor write for as long as 9 months. Finally, this
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type of diversification may also lead to having calls at various striking prices as· the
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market fluctuates cyclically. All of one's stock is not necessarily committed at one
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price if this diversification technique is employed.
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This concludes the discussion of how to establish a covered writing position
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against stock. Covered writes against other types of securities are described later.
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FOLLOW-UP ACTION
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Establishing a covered write, or any option position for that matter, is only part of the
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strategist's job. Once the position has been taken, it must be monitored closely so that
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adjustments may be made should the stock drop too far in price. Moreover, even if
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the stock remains relatively unchanged, adjustments will need to be made as the writ
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ten call approaches expiration.
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Some writers take no follow-up action at all, preferring to let a stock be called
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away if it rises above the striking price at the expiration of the option, or preferring
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to let the original expire worthless if the stock is below the strike. These are not
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always optimum actions; there may be much more decision making involved.
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Follow-up action can be divided into three general categories: |