Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 305

proceeds. Of course if Ford does happen to go to $100 those shares will still be taken away from you at $50, making you wish you hadn't written the calls, but at least you don't have to go out and buy them at $100. The downside here is the same as owning any stock. If Ford happens to fall to $40, the FAJ contracts you wrote will expire worthless, but you still own the 200 shares of Ford that are down $10 per share from where you bought them. At this point you can continue to hold them, which allows you to sell more covered calls on them, or sell them at a loss, but that's the stock side of the story.

One of the more popular methods of writing covered calls is writing out-of-the-money covered calls, especially with those stocks that you intend to hold for a long time. Suppose you own 1,000 shares of Ford that you bought many years ago and are intending to hold. The stock has appreciated quite a bit over the years and it also pays dividends but you are looking to milk it even more. It is early January and Ford is trading at $50. Then how about writing 10 FAK (January 55) covered calls at $1/2 premium and collecting the $500 proceeds. If Ford goes up in price but stays at or below $55, those options will expire worthless and you keep the $500 and you keep your shares. If Ford goes above $55, your 1,000 shares will get assigned at $55 per share. Yes, you have to say goodbye to your shares, but you keep the $500 proceeds from writing the calls and you receive $55 per share at expiration. And if the stock happens to take a dive, you still keep the $500 and you continue to hold on to your shares, which you wanted to do anyway.

Can this be true? No downside risk? If you had intended to keep those shares through thick and thin but at the same time you don't mind having them taken away at $55, you could say that there is no downside risk here. That is why writing covered calls is so popular among investors. And that is why your broker would qualify you much faster for them than for writing naked calls. My opinion: as long as you


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    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A

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