Writing Covered Option Calls Investment Tips

Writing covered option calls is a popular strategy for those who want to supplement their income. The strategy is simply to sell (write) call options on stocks that you own. If you think one of your stocks isn’t likely to change appreciably over the next 3 months, you can sell a call option for, say, $3 a share. If you’re right and the stock doesn’t go anywhere, you pocket the $3 and keep the stock, plus any dividends that it may pay. If the stock should go higher, it may be called away from you by the option holder, but you’ll still get the strike price of the stock and the $3 a share for the option.

Covered option writing limits your upside, but it can add to your income ad is an especially effective strategy in a flat market or for income-oriented investors.

Hints for Success in Writing Covered Calls

Stock with stocks that pay dividends. Covered call writing is best done with stocks that pay dividends.

Avoid highly volatile stocks. First, highly volatile stocks rarely pay dividends. Second, it is very difficult to make up in option premiums the large drop that can occur in a highly volatile stock.

Study your stocks carefully to maximize your return. To maximize your return, find stocks that have good option premiums, as well as paying dividends.

Option trading is very complex, and there are dozens of books on the subject if you care to pursue it. For a brief introduction to the basics, try the primer at the Learning Center of the Chicago Board Options Exchange at http://www.cboe.com.

Hints for Successful Option Hedging

Use a direct hedge on your own stocks. The most direct hedge position you can take is to buy a put on the stocks you own. Foe example, if you own Microsoft, an appropriate Microsoft put can provide some protection against a loss on Microsoft shares.

Hedge your entire portfolio with an index put. Options on indexes can be used to hedge your entire portfolio. To do this, you might buy an OEX put (on the S&P 100 index). If the whole market declines, the money you are likely to make on your put will help offset the losses in your regular portfolio.

Minimize your costs. Try to develop a hedge position at minimum cost. There are many sophisticated option strategies involving spreads than can reduce the cost of the hedge. They are beyond the scope of this article, but if you intend to pursue option hedging as a strategy, it would be wise to learn about these strategies.