42 lines
2.3 KiB
Plaintext
42 lines
2.3 KiB
Plaintext
C1,,,pter 2: Covered Call Writing
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TABLE 2-26.
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Two months of incremental return strategy.
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Day 1 : XYZ = 60
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Sell 3 XYZ October 60's at 7
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One month later: XYZ = 70
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Buy back the 3 XYZ Oct 60's at 11 and
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sell 5 XYZ Oct 70's at 7
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Two months later: XYZ = 80
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Buy back the 5 Oct 70's at 11 and
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sell 10 XYZ Oct 80's at 6
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COVERED CALL WRITING SUMMARY
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93
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+$2, 100 credit
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-$3,300 debit
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+$3,500 credit
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-$5 ,500 debit
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+$6.000 credit
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+$2,800 credit
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This concludes the chapter on covered call writing. The strategy will be referred to
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later, when compared with other strategies. Here is a brief summary of the more
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important points that were discussed.
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Covered call writing is a viable strategy because it reduces the risk of stock own
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ership and will make one's portfolio less volatile to short-term market movements. It
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should be understood, however, that covered call writing may underperform stock
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ownership in general because of the fact that stocks can rise great distances, while a
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covered write has limited upside profit potential. The choice of which call to write
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can make for a more aggressive or more conservative write. Writing in-the-money
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calls is strategically more conservative than writing out-of-the-money calls, because
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of the larger amount of downside protection received. The total return concept of
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covered call writing attempts to achieve the maximum balance between income from
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all sources - option premiums, stock ownership, and dividend income - and down
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side protection. This balance is usually realized by writing calls when the stock is near
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the striking price, either slightly in- or slightly out-of-the-money.
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The writer should compute various returns before entering into the position:
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the return if exercised, the return if the stock is unchanged at expiration, and the
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break-even point. To truly compare various writes, returns should be annualized, and
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all commissions and dividends should be included in the calculations. Returns will be
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increased by taking larger positions in the underlying stock - 500 or 1,000 shares.
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Also, by utilizing a brokerage firm's capability to produce "net" executions, buying the
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stock and selling the call at a specified net price differential, one will receive better
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executions and realize higher returns in the long run. |