New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock Investing
- You want the long-term returns from stocks but don't like the volatility.
- You like the security of income from bonds and CDs, but the yields are too low.
- You wish there was a sensible discipline you could follow that would provide the attractive returns offered by common stock yet with more consistency and less risk.
If so, then covered call writing may be the investment strategy you’ve been looking for.
You can achieve long-term returns commensurate with stock market returns but with lower volatility and less downside risk. The trick is to combine stocks with call options by "writing" a call against a stock you already own. Professional investment managers have been using this strategy for years, and recent developments have now made it easier for individual investors to employ it as well. Options experts Richard Lehman and Lawrence McMillan unlock the secrets of covered call writing in this groundbreaking, easy-to-understand guide.
Part I: BUILDING THE FOUNDATION.
CHAPTER 1: Option Basics.
What Are Options?
How Options Compare with Stock.
Listed versus Unlisted.
Players and Positions.
Exercise and Assignment.
The Basic Mechanics.
What Happens at Expiration.
Covered versus Naked.
Options in Your Account.
Recapping Option Basics.
CHAPTER 2: Just Beyond the Basics.
Fair, or Theoretical, Value.
Theory versus Reality.
How Options Are Traded.
Recapping Just Beyond the Basics.
CHAPTER 3: Covered Writing Mechanics.
Requirements for "Valid" Covered Writes.
Risk/Reward of a Covered Write.
Risk/Reward Characteristics Over Time.
Shorting a Call versus Shorting a Stock.
More on Exercise and Assignment.
Calculating Potential Returns.
Return if Exercised (RIE).
Return Based on Net Debit.
Part II: EXECUTING THE STRATEGY.
CHAPTER 4: Turning a Position into a Strategy.
A New Way of Thinking.
The Simple Case: Doing Nothing until Expiration.
Closing Part or All of the Position.
Rolling Up and Out.
Covered Call Strategies.
The Total Return, or "Buy-Write," Approach.
The Incremental Approach.
Hedging Individual Stocks.
Reducing Risk in Small Portfolios.
Writing Calls on "Hot" Stocks.
Tax Deferral Strategies.
CHAPTER 5: The Benefits of Covered Writing.
The Rationale Behind Covered Writing.
Call Writing and Stock Returns.
Major Factors Affecting Call Writing Returns.
Covered Writes Compared with Stocks Over Time.
The BuyWrite Index (BXM).
Real-World Results for Twenty Stocks.
Results by Calendar Year.
Effects of Writing a Higher Strike Price.
CHAPTER 6: Intangible Benefits.
What is Long Term, Anyway?
The Covered-Write Solution.
The Benefits in Detail.
CHAPTER 7: Implementation.
Deciding on Your Approach.
Traps Involved in Writing for Incremental Return.
The Total-Return Approach.
Traps in the Total-Return Approach.
Are You a Fundamentalist or a Technician?
Selecting Stock Positions.
Searching All Stocks.
Searching Specifically for Covered Writes.
Selecting Calls to Write.
Which Strike Price?
Which Expiration Month?
Getting Your Ducks in a Row with Your Brokerage.
Full-Service versus Discount Brokers.
Which Account to Use?
Writing Calls on Your Employer's Stock.
Market and Limit Orders.
Using Spread Orders When Rolling.
Basic Tax Rules for Options.
Precepts for Covered Call Writers.
CHAPTER 8: Advanced Implementations.
Covered Writing on Margin.
Margin Rules for Covered Writes.
Advantages of a Margined Covered Write.
Covered Writing against Securities Other than Stock.
Covered Writing on "Diamonds," "Qs," and Other ETFs.
Writing Calls against Convertible Securities.
Writing Calls against Other Options—The "Call-on-Call" Covered Write.
Covered Writing on LEAPS.
Partial Writing, Mixed Writing, and Ratio Writing.
Advantages of Put Writing.
Disadvantages of Put Writing.
Implied Volatility and Overvaluations.
Efficiency, Inefficiency, and Overvaluation.
CHAPTER 9: Tools for Covered Writers.
Industrial Strength Option Software.
What Will This Cost You?
Internet Resources for Covered Call Writers.
Appendix A: Timeline of Options Trading in the United States.
Appendix B: Sample Covered Writing Spreadsheet for Tax Purposes.
Appendix C: Tax Rules for "Qualified" Covered Call Options.
Appendix D: Twenty-Stock Covered Call Study.
Lawrence G. McMillan is recognized as one of the foremost options trading experts. He has written three best-selling books on options, including Options as a Strategic Investment. As president of McMillan Analysis Corporation, he writes the "Daily Volume Alerts" and edits and publishes The Option Strategist, a derivative products newsletter covering equity, index, and futures options, as well as the online resource OptionStrategist.com.
President, MurphyMorris Money Management
Chief Technical Analyst, StockCharts.com
"This was a definite eye-opener, and one of the soundest approaches to stock investing I’ve seen. It makes you wonder what else Wall Street has been keeping from us."
—Brian R. Workman
Senior Vice President, Citi Cards, Citigroup
"In a low-return, high-volatility environment, these strategies can boost returns and lower risk. There is no such thing as a free lunch, but in this case all the lunch costs is a little initiative."
—Stephen M. Savage
Managing Director, Litman/Gregory Analytics
"This book has the most complete and comprehensive coverage of covered call investing that I have seen. Most books discuss covered calls as just one of many option techniques. This book goes the extra mile. It discusses the theoretical aspects of covered calls and also provides the practical tools any investor would need to effectively implement a covered call trading strategy."
President, Power Financial Group, Inc.