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 328

reason: to be sold to the unsuspecting crowd. Caution is definitely advised when taking them seriously, even if they have been right a couple of times in the past.

Income Drawing, Hedging, And Speculating

At this point you may be tempted to think that options trading is speculative in nature, meaning that there is a high degree of risk associated with it. This holds true when traders engage purely in options trading, but as we saw in the case of writing covered calls, options could in fact offer great risk management when used in proper combination with other investments. In terms of covered calls, we learned how writing call options against stocks you already owned could actually squeeze more profits from your holdings with little downside risk if you were planning to hold onto the stock. For example, if you own 200 shares of Ford at $50 and it is early January, you could sell 2 FAK (January 55 call) covered call contracts at $1/2 premium for a total of $100 (excluding commission). If Ford never passes $55 at the FAK expiration date, you keep the $100 and the 200 shares. If it does surpass $55, you still keep the $100 but lose those 200 shares at $55 per shares, $5 above the $50 price when you wrote those covered calls and even more if you had bought your 200 shares at an earlier time when Ford was cheaper. Of course, if Ford shoots up to $70 and you hadn't written the FAK contracts, your would have made $20 per share (if you decided to sell your shares at that point). That is the little risk you take, but chances are that you would still be happy with your profits from selling the covered calls. If Ford dives to $40, you still keep the $100 and continue to hold onto your shares.

There are two cases when writing covered calls may cost you:


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

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