Covered Call Writing Philosophy
From: McMillan, Lawrence G.,Options as a Strategic Investment, 3rd ed, pp.34-35, New York Institute of Finance, Paramus, NJ, 1993.
[This quotation is provided as a benchmark from which to take the measure our own discussions. I imagine that some of you have a slightly different “take” the CC Writing Philosophy. I suggest we need to articulate and understand our differing points of view. –dfl]
“The primary objective of covered writing, for most investors, is increased income through stock ownership. An ever-increasing number of private and institutional investors are writing call options against the stocks that they own. The fact that the option premium acts as a partial compensation for a decline in price be the underlying stock, and that the premium presents an increase in income to the stockholder, are evident. The strategy of owning the stock and writing the call will outperform outright stock ownership if the stock falls, remains the same, or even rises slightly. In fact, the only time that the outright owner of the stock will outperform a covered writer is if the stock increases in price by a relatively substantial amount during the life of the call.. Moreover, if one consistently writes call options against his stock, his portfolio will show less variability of results from quarter to quarter. The total position –- long stock and short option -– has less volatility than the stock alone, so on a quarter–by-quarter basis, results will be closer to average than they would be with normal stock ownership. This is an attractive feature, especially for portfolio managers.” |
