Covered Call Writing
To the Editor:
Michael Thomsett’s article on covered calls (“The Covered Call: An Income-Generating Options Strategy,” August 2010 AAII Journal) clearly explained the process and benefits but I think he minimized the income possibilities by shying away from stocks one wants to retain long term and by not restricting purchases to lower-cost stocks. An option at $0.50 on a $10.00 stock is a 5% return (not including dividends, when applicable). If that can be replicated quarterly, then that is 20% annually. Assuming 50% for taxes, that still nets 10% per year.
Sometimes one sells at a strike price above one’s cost, so if the option is exercised one benefits from additional return. If the stock seems to be fundamentally meeting one’s criteria, then it can be repurchased again at the new (higher) cost basis and the process repeated.
In fairness, it should be pointed out that the share price can drop so that either the option premium is minimal or one must risk having the stock
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