37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 2: Covered Call Writing 43
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PHYSICAL LOCATION Of THE STOCK
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Before getting more involved in the details of covered writing strategy, it may be use
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ful to review exactly what stock holdings may be written against. Recall that this dis
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cussion applies to listed options. If one has deposited stock with his broker in either
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a cash or a margin account, he may write an option for each 100 shares that he owns
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without any additional requirement. However, it is possible to write covered options
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without actually depositing stock with a brokerage firm. There are several ways in
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which to do this, all involving the deposit of stock with a bank.
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Once the stock is deposited with the bank, the investor may have the bank issue
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an escrow receipt or letter of guarantee to the brokerage firm at which the investor
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does his option business. The bank must be an "approved" bank in order for the bro
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kerage firm to accept a letter of guarantee, and not all firms accept letters of guaran
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tee. These items cost money, and as a new receipt or letter is required for each new
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option written, the costs may become prohibitive to the customer if only 100 or 200
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shares of stock are involved. The cost of an escrow receipt can range from as low as
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$15 to upward of $40, depending on the bank involved.
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There is another alternative open to the customer who wishes to write options
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without depositing his stock at the brokerage firin. He may deposit his stock with a
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bank that is a member of the Depository Trust Corporation (DTC). The DTC guar
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antees the Options Clearing Corporation that it will, in fact, deliver stock should an
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assignment notice be given to the call writer. This is the most convenient method for
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the investor to use, and is the one used by most of the institutional covered writing
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investors. There is usually no additional charge for this service by the bank to insti
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tutional accounts. However, since only a limited number of banks are members of
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DTC, and these banks are generally the larger banks located in metropolitan centers,
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it may be somewhat difficult for many individual investors to take advantage of the
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DTC opportunity.
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TYPES Of COVERED WRITES
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While all covered writes involve selling a call against stock that is owned, different
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terms are used to describe various categories of covered writing. The two broadest
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terms, under which all covered writes can be classified, are the out-of the-rrwney cov
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ered write and the in-the-rrwney covered write. These refer, obviously, to whether the
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option itself was in-the-money or out-of-the-money when the write was first estab
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lished. Sometimes one may see covered writes classified by the nature of the stock
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involved (low-priced covered write, high-yield covered write, etc;), but these are only
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subcases of the two broad categories. |