Covered Call Writing: The Pros And Cons

By Author: Tim Leary
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There are many of you as personal investors who have used covered call writing to collect rent on portfolio stocks or just to create a nice weekly or monthly pay check. There are also many of you who have not used covered call writing since they are options and perceived as high risk. Outlined below are some of the pros and cons.

When you sell (write) an option at whatever strike price you choose, you are contractually obligated to deliver that stock to the seller at option expiration. It is covered because you already own the underlying stock.

The price you receive for selling the call is the option premium. This is yours to keep and is transferred to your account immediately. If the call option expires (it is below the strike price that was sold), either you sell the underlying stock and keep the premium or you keep the stock and sell more options for the next month.

Also known as buy-write, covered call writers usually sell calls when they have either a neutral or slightly bullish or bearish outlook in the near term for the stock.

If the stock price runs up and is higher than the strike price ...
... of the call that was sold, the writer has two options. Either surrender the stock at the higher price, forgoing the gains and keeping 100% of the premium or buy back the call at the higher price and possibly sell next month (or week) to offset the difference.

Pros

1. Covered calls provide instant income into your account, and you get to keep the premium no matter what happens to the stock
2. Covered calls can be sold using weekly options or monthly options, making the profit opportunities awesome
3. Covered calls are considered a conservative investment and can be used in 401K and IRA accounts
4. According to the Chicago Board Option Exchange (CBOE), over 80 percent of options expire worthless, so it is more profitable to be an option seller

5. There is a covered call strategy for every type of market - up, down or sideways.

Cons

1. If the stock you choose blasts up, you may have to either buy back the calls you sold at a higher price if you want to keep the stock or give up the stock gains.

2. Holding calls (or puts) during earnings week is always challenging. Now with Weeklys, you can sit out earnings week though.

3. Option premiums can vary depending on the volatility of the stock. In other words, if you have very conservative stocks that are safe and inch up, they may not be great candidates for selling the calls.

That is it from my perspective. I have been writing covered calls for years and the Pros overwhelm the Cons. If I think a stock is going to run, I do not sell a call, bank the increase and start selling calls when the stock consolidates.

Call Strategies
Many savvy investors do this every month; creating a paycheck with minimal risk that can easily be 3% to 5% of the invested funds (that is 48% a year and 60% if compounded, meaning that no funds are withdrawn.

It is important to know the various call strategies when selling covered calls. A writer needs to understand how the stock is trending, how the stock’s sector is trending and what the broad market (Dow, S-P, etc) is doing.
About Author:
Tim Leary is a full time trader and writes (sells) covered calls, earning 3% to 5% monthly in bull and bear markets, with limited risk. To get a 50-page covered call writing report, click here.