Frequently Asked Questions
Q: What is a Covered Call?
A: A covered call is an investment strategy in which an investor writes (sells) a call option contract while at the same time owning an equivalent number of shares of the underlying stock. The investor assumes the obligation to sell his or her stock at a fixed price for a specified period of time in the future. In exchange for assuming this commitment to sell the stock, the investor receives a premium (income) that is deposited into the investor's account.
Q: How can the Covered Call Strategy help me preserve and grow my investment portfolio?
A: By owning stock positions and writing covered call contracts on these stocks in a disciplined manner, cash received on settlement of the option sale are automatically swept into the money fund option of your brokerage account on a regular basis thus increasing the value of your portfolio. These funds provide limited protection against a decline in market prices. They also constitute a steady stream of income that can be used to purchase additional shares or can be withdrawn.
Q: Is the selling of Covered Call options risky?
A: The Covered Call Writing strategy is considered to be a conservative choice among the four basic option-investing techniques. In fact, it is one of only two option-investing methods allowable in individual retirement accounts due to its status as a wealth preservation strategy. Furthermore, covered call writing is more conservative than simply owning stocks under a buy-and-hold strategy.
Q: Who should use Covered Calls?
A: An investor who is interested in creating a more reliable income stream, neutral to moderately bullish on the direction of the stock market, and is willing to limit his/her upside potential in exchange for the downside protection and income generating ability of the investment strategy.