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URL:  https://boards.fool.com/i-do-covered-calls-i-divide-two-situations-1-29076701.aspx

Subject:  Re: covered calls Date:  2/2/2011  10:49 PM
Author:  Crosenfield Number:  68378 of 103189

I do covered calls.

I divide two situations: 1) buy a stock for the purpose of selling the call at a high price. and 2) sell a call on a stock I've owned for awhile and now can see a price where I'd like to sell the stock.

The first is called a buy-write. The price of the call is high because the stock is volatile. You sell your potential to make a really good profit, and you for a few $ per share you've kept the risk of the stock tanking. Good way to get burned. You also pay two commissions. The risk/reward is exactly the same if you sell a put at a price where you'd like to buy the stock, and that is just one commission. Fewer brokers will let you do it, however.

Selling the call on a stock you've owned for awhile and you already have a long-term capital gain has, for me, had a better chance of turning out well, particularly if the stock is a good payer of dividends.

If one is getting close to expiration time and the option is in the money, you look for the option to be exercised the day before the stock would go ex-dividend. The buyer of the call just took the dividend away from you. So you need to be aware of this and decide whether you are going to let the option be exercised, or buy it back. If there isn't a dividend involved, the option isn't likely to be exercised until expiration.

When an option is exercised, a discount broker may charge a commission considerably higher than your normal buys and sells. You need to know what the figure would be for your broker.

There is a board here "Options--You Make the Call". You can check over there.

At one time there were mutual funds with the word "Plus" in the title. They wrote covered calls on their stocks. The good stocks got called away and they were left with the dregs. These were funds that were supposedly run by professionals. Beware. The strategy has its uses but you have to be selective.

Best wishes, Chris
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