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Covered Calls


The covered call write is a strategy that has the ability to meet the needs of a wide range of investors. It can be used in a Keogh, margin, cash account or IRA against stock an investor already owns or is planning to purchase. Today's investor has a choice of multiple strike prices as well as short-term and long-term expirations (LEAPS ®) from which to craft a strategy that meets requirements for both returns on investment and limited downside stock price protection. This strategy is widely considered a conservative one. It allows in investor to be paid for assuming the obligation of selling underlying shares at a specified price higher than purchase price, in return for a reduced downside risk from holding underlying shares (a lower break-even point).

An investor who considers writing a covered call can calculate in advance an expected return for the position if assignment is made and the stock is called away. Though early assignment is always possible, it is somewhat predictable in certain cases before a dividend paid to underlying shareholders.

Before writing any covered equity call, an investor should be comfortable with the possibility that assignment is always possible whether because of an impending dividend or the stock price rising above the strike price by expiration. If for whatever reason this is a totally undesirable scenario, then the investor might choose not to write the call in the first place. If downside stock price protection was the primary motivation for selecting this strategy, there are other strategies, such as a protective put, which might achieve this more effectively.

Covered Call Strategy Worksheet

Download the "Who Should Consider Using Covered Calls?" Worksheet

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