Secret 49 WHEN TO USE COVERED CALL WRITING

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One conservative way to write options is to do covered call

writing. This is a way to generate additional income for your

stock portfolio. Covered call writing refers to writing calls against

the stocks that you own.

Here, there is no risk from writing the call. The obligation of

writing the call is offset by owning the stock. For example, if you

own 100 shares of Pfizer priced at 40 and write the Pfizer Jan 45

call at 2, you receive $200 to your account but are obligated if

Pfizer is above 45 and you are exercised to deliver the stock at 45.

Covered call writing is ideal when you have a target where

you wish to sell the stock. Then you are getting paid as you wait

for the stock to hit your target. In our Pfizer example, if your target

for Pfizer was 45, you receive $200 as you wait for the stock

to exceed 45. If the stock does not get to 45, you can write another

option with a strike price of 45 and collect more premium

as you wait. If the stock is called away at 45, you receive 45+2 or

$47 a share.

When you don’t want to sell the stock, follow the guidelines

that we presented in the previous chapters. Only write an out-ofthe-

money option with a high probability of expiring, set a stoploss

and buy back the option if the stop is hit. Then you can roll

into a new option writing position, further out-of-the-money if

you desire.

Your danger here is that the stock could gap up over the

strike price, and you could take a bath buying back those options.

Always close out all positions when most of the premium vanishes.

Avoid covered call writing on a stock in a strong up-trend

unless you believe it is making a top, and then it may be wiser to

sell the stock than to write calls on the stock.

One conservative way to write options is to do covered call

writing. This is a way to generate additional income for your

stock portfolio. Covered call writing refers to writing calls against

the stocks that you own.

Here, there is no risk from writing the call. The obligation of

writing the call is offset by owning the stock. For example, if you

own 100 shares of Pfizer priced at 40 and write the Pfizer Jan 45

call at 2, you receive $200 to your account but are obligated if

Pfizer is above 45 and you are exercised to deliver the stock at 45.

Covered call writing is ideal when you have a target where

you wish to sell the stock. Then you are getting paid as you wait

for the stock to hit your target. In our Pfizer example, if your target

for Pfizer was 45, you receive $200 as you wait for the stock

to exceed 45. If the stock does not get to 45, you can write another

option with a strike price of 45 and collect more premium

as you wait. If the stock is called away at 45, you receive 45+2 or

$47 a share.

When you don’t want to sell the stock, follow the guidelines

that we presented in the previous chapters. Only write an out-ofthe-

money option with a high probability of expiring, set a stoploss

and buy back the option if the stop is hit. Then you can roll

into a new option writing position, further out-of-the-money if

you desire.

Your danger here is that the stock could gap up over the

strike price, and you could take a bath buying back those options.

Always close out all positions when most of the premium vanishes.

Avoid covered call writing on a stock in a strong up-trend

unless you believe it is making a top, and then it may be wiser to

sell the stock than to write calls on the stock.