31 lines
2.4 KiB
Plaintext
31 lines
2.4 KiB
Plaintext
94 Part II: Call Option Strategies
|
||
The selection of which call to write should be made on a comparison of avail
|
||
able returns and downside protection. One can sometimes write part of his position
|
||
out-of-the-money and the other part in-the-money to force a balance between return
|
||
and protection that might not otherwise exist. Finally, one should not write against an
|
||
underlying stock if he is bearish on the stock. The writer should be slightly bullish, or
|
||
at least neutral, on the underlying stock.
|
||
Follow-up action can be as important as the selection of the initial position
|
||
itself. By rolling down if the underlying stock drops, the investor can add downside
|
||
protection and current income. If one is unwilling to limit his upside potential too
|
||
severely, he may consider rolling down only part of his call writing position. As the
|
||
written call expires, the writer should roll forward into a more distant expiration
|
||
month if the stock is relatively close to the original striking price. Higher consistent
|
||
returns are achieved in this manner, because one is not spending additional stock
|
||
commissions by letting the stock be called away. An aggressive follow-up action can
|
||
also be taken when the underlying stock rises in price: The writer can roll up to a
|
||
higher striking price. This action increases the maximum profit potential but also
|
||
exposes the position to loss if the stock should subsequently decline. One would want
|
||
to take no follow-up action and let his stock be called if it is above the striking price
|
||
and if there are better returns available elsewhere in other securities.
|
||
Covered call writing can also be done against convertible securities - bonds or
|
||
preferred stocks. These convertibles sometimes offer higher dividend yields and
|
||
therefore increase the overall return from covered writing. Also, the use of warrants
|
||
or LEAPS in place of the underlying stock may be advantageous in certain circum
|
||
stances, because the net investment is lowered while the profit potential remains the
|
||
same. Therefore, the overall return could be higher.
|
||
Finally, the larger individual stockholder or institutional investor who wants to
|
||
achieve a certain price for his stock holdings should operate his covered writing strat
|
||
egy under the incremental return concept. This will allow him to realize the full prof
|
||
it potential of his underlying stock, up to the target sale price, and to earn additional
|
||
positive income from option writing. |