Covered Writing

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 10, No. 21 on November 8, 2001. 

Recently, we have been receiving a number of inquiries from stock holders who are intrigued by the idea of selling covered calls against a core portfolio of stocks. Several factors in the overall marketplace have piqued this interest: the bear market, the relatively high level of premiums that exists currently, the low level of dividend payouts on most stocks, and just a general feeling among stock holders that they need to “do something” to improve what is now going on two years of dismal results.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 17 on September 14, 2000. 

Covered call writing is not a subject that we often discuss in this newsletter. There are several reasons for that, which we’ll get into in just a moment. However, there is a certain type of covered call write – one in which the call is quite expensive – that sometimes attracts traders looking for a “free ride.” To a certain extent, this strategy is something of a free ride. As you might imagine, though, there can be major problems (we’re still looking for that illusory free lunch on Wall Street, but haven’t ever been able to find it).

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 4, No. 13 on July 13, 1995. 

Most option traders quickly realize that time is a very heavy factor weighing on the price of an option. This lesson often is driven home after buying an option and losing money.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 17, No. 15 on August 15, 2008. 

Trading or investing involves several facets of operation: trade analysis, money management (including trade execution and position size), and follow-up action (including exiting the trade). Most successful and experienced traders agree that trade analysis is the least important – contrary to what a novice would expect. In fact, I have seen a successful system trader state that he could turn any reasonable system into a profit through proper money management (i.e., through proper position sizing and follow-up action).

If one is too conservative, he can ruin a successful system (by stopping himself out at the tiniest hint of a loss, for example). On the other hand, if one is too aggressive – say, leveraging position size up too aggressively when profits exist, he will also fail because one small downturn will eventually be a disastrous loss.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 11, No. 4 on February 28, 2002. 

Covered call writing is not a particularly “sexy” topic – in fact, it’s a strategy that I don’t espouse nearly as often as it is practiced. However, it does have its uses – particularly for specific types of accounts. So, in this article, we’re going to take a fresh look at covered call writing – perhaps from a slightly different viewpoint than you’ve thought about it before. The types of statistics that are covered in this article are going to be available in the new subscriber section of our web site, The Strategy Zone.

This article was originally published in The Option Strategist Newsletter Volume 13, No. 3 on February 12, 2004. 

Also known as the incremental return concept of covered call writing, this form of selling options against stock that is owned has several benefits that most investors don't realize. The goal of this strategy is to allow stock appreciation for a block of common stock between the current price and a selected target sale price, while also earning an incremental amount of income from selling options. The target sale price can be substantially above the current stock price. The typical investors positioned for this strategy are those with large stock holdings, interested in increasing current income, and wanting to refrain from selling the stock near current levels.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 3, No. 23 on December 8, 1994. 

We have written a few articles about collars this year, but another one is appropriate because it is a strategy that can give one peace of mind in a market like this.

To review, a collar consists of long stock, a long out-ofthe- money put, and a short out-of-the-money call. The resulting position has limited risk, because of the ownership of the put. It also has limited profit potential, because of the presence of the short call. In general, investors don’t like to pay a lot of cash out of pocket for the put/call combo that sits on top of the stock. In fact, a “no-cost collar” is one in which the price of the call is equal to or greater than the price of the put when the position is established.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 6, No. 2 on January 22, 1997. 

In this article, we're going to take a look at the strategy of selling options. Just how profitable it is, and some of the considerations for naked selling or for using credit spreads. With option premiums inflated in many markets because of increased volatility, this seems like a timely topic. I'm not specifically including covered writing in this discussion, but since a covered call write is equivalent to selling a naked put, you can apply any of the commentary that pertains to naked put selling.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 2, No. 9 on May 13, 1993. 

Covered call writing is not one of our normally recommended strategies, because we prefer ratio writing or the equivalent, since it is a more neutral strategy. However, covered writing is a strategy practiced by many option investors and therefore is a topic worthy of discussion. In this article, we will approach this subject from a slightly different, more sophisticated viewpoint: we will compare the covered call write with the sale of a naked put. In addition, we'll see how this comparison leads us to conclusions regarding neutral strategies such as ratio call writing or straddle and combination selling.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 10, No. 22 on November 21, 2001. 

This is not really a year-end tax strategy, but it is something that covered writers who are writing calls against low-cost-basis stock should consider.