If you own stock in your portfolio, should you sell covered calls against it?
This depends. Would you be happy to have 100 shares called away at the strike? If so, selling a covered call makes sense. You may earn a capital gain on the stock, dividends, and the option premium. This may be preferable to just holding onto the stock for the long term.
However, if you think the stock has much more growth potential than its current price and you’re holding it for that reason, the covered call might not be right for you. If you do not want to relinquish shares even for a decent (stock appreciation plus option) profit, then you should give the stock a chance to appreciate further. If the thought of having stock called away troubles you, don’t even think about this idea. It could be a mistake.
I opened a covered call position Monday in the virtual portfolio I track at ThomsettOptions.com, based on Friday’s closing prices. If it is exercised, the stock will be called away at a profit, which is fine. This is one of the reasons for generating current income with the covered call.
So the rationale of owning stock as well as what you think its price will be at a certain date in the future, determines whether or not you should be writing covered calls. As long as you make a good profit if the call is exercised, and you would be happy to sell, the covered call is one of the best strategies. I hope you will visit this site and study the full explanation of this position as well as many other positions in the virtual portfolio. I provide stock charts for many of these at the time strategies are opened, and then explain in detail my strategies for modifying or closing the positions. The track record of this portfolio is worth review, so I hope to see you there. Please go tohttp://tinyurl.com/aqeeops to get started.
Michael C. Thomsett is co-founded of ThomsettOptions.comand has also written many options books. These include the best-selling Getting Started in Options (Wiley, currently in production on its 9th edition and with over 300,000 copies sold); and Options Trading for the Conservative Investor(FT Press, 2nd ed.). Michael lives near Nashville, Tennessee and writes fulltime. He also is an instructor of several options courses with the N.Y. Institute of Finance.