Tag Archives: Covered Calls

The benefits and features of writing Covered Calls

#1 Additional Income Writing covered calls can provide you with an ongoing stream of income from the option premium. This is particularly important when stocks do not pay dividends or pay very small dividends. The call option premium can also substantially increase total returns in flat or slower growth stock markets. #2 Income paid up-front The income from writing covered calls in credited to your account the next day, creating immediate cash flow that can be reinvested, withdrawn from cash management accounts or used to pay interest on margin loans. Since the call option premium is paid up front it can be reinvested to enhance the total return of your portfolio. #3 Predetermined Return In a rising market, the immediate return from call writing can be evaluated prior to initiating the investment position. You will know what the call writing income will be and the maximum additional capital appreciation you may expect from your shares. Covered Call Portfolio Management Software The Trader’s alternative to MYOB, Quickbooks and Excel. Get your FREE 20 day trial of OTrader Investment Portfolio management software for stocks, options and warrants. #4 Risk Reduction If a stock declines in price,(Not that they ever do that…) the call writing income will help to offset some or all of the capital loss. Writing covered calls will provide some downside protection when stock decline in value. #5 Cash Dividends As a writer of covered calls you will continue to be entitled to cash dividends so long as you own the shares. Beware dividends can lead to early exercise though. #6 Novation Exchange-listed option contracts like shares, are interchangeable with another contract with exactly the same expire month and strike price. This is known as ‘novation’. This enables the covered call option to be initiated through a ‘sell to open’ order, but also to close out the position if desired through a ‘buy to close’ order. Got a question about covered calls? Let me know.