The Versatility of Writing Covered Calls

Covered call writing is one of the most popular option strategies used by individual investors.  It's a topic that has already been discussed on this blog.  But it's a versatile strategy and today I thought I'd share an intelligent use for covered call writing – an idea that is seldom discussed. 

Let's assume you own shares of stock and it has reached a point in time when you no longer want to own these shares, but you don't want to let them go at today's price.  You can write call options to give you a much better change to sell stock at an elevated level.

For example, assume that you bought GOOG when it dropped sharply some months ago, and today have a gain of more than 100 points.  Being a bit greedy, you decide that 440 is your target price.

Yesterday the stock closed @ 408.  You decide to sell one Sep 400 call for each 100 shares of stock and collect $40.  If the stock remains above 400 when September expiration rolls around, you will collect $400 per share, plus the $40 you receive now.  That's $440 per share.

Perhaps you don't want to hold stock for such a long period of time – especially when you don't own any puts for protection.  In that case, you could consider writing the Jun 430 call at price near $10.  The call was offered at less than $9 yesterday, so it would take a rally to collect $10. 

Note:  There is no discussion of whether you are being greedy (my vote is yes) or whether you should be satisfied with the current profit.  This is a hypothetical example illustrating how to collect an above market price for shares you want to sell.

If you truly want to hold the stock to eke out some more profits, but holding the stock feels dangerous, you can take this rally as an opportunity to buy some inexpensive insurance.  If you buy the Jun 360 or 370 put, it doesn't cost too much ($350 to $500 per put) and gives you more staying power to attempt to reach your $440 goal.


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