Systematic Covered Writing

An investor purchases a stock he or she would enjoy owning in a given portfolio. A call option is then immediately sold against this stock, generating a cash position along with the stock holding. Following these initial transactions, one of two events will happen.

· Either the option will be exercised at a specified price on or before a specified date, which means the stock will be sold.

· Or the option will expire worthless and the premium (cash) received from the sale of the call will be retained along with the stock with a value determined by the current market price.

The investment just described is referred to as a Covered Call. Realize at the time the initial investment is made the gain if the option is exercised can be determined. Notice the word 'potential' was not placed before the word 'gain' in the previous sentence. That is because, if the position is established correctly, there will be a gain when the option is exercised and the amount of that gain can be determined prior to the position being established.

If the option is not exercised, which is the only other possibility, the writer (seller) of the call option would keep the cash received when the option was sold. The covered writer would also keep the stock, which from the beginning 'the covered writer would enjoy having in the portfolio'. The function of this material is to provide the reader with an exposure to ideas about investing which may not have been at the reader’s disposal.

Two questions to consider:

1. Which of the two possible outcomes described above (and repeated below) would be considered ‘bad’?

· A stock position is sold at a predetermined price and a predetermined gain is realized or

· The stock remains in the portfolio along with the cash generated when the call option was sold.

2. Has writing covered calls been suggested as a viable method of investing when recalling previous dealings with brokers?

Systematic Covered Writing provides some good news in that it illustrates a third way of investing. The third method could be referred to as a pro-active method.

This material is provided for educational and/or informational purposes only and should not be considered as otherwise. No example or statement within this material should be construed as a recommendation to buy or sell a security, be it a stock or call option.