Wall Street Journal and Covered Calls
March 1st, 2007 by John BrasherYesterday’s WSJ featured an interesting article by James B. Stewart (p. D3) on a technique for portfolio writing. The author writes covered calls at pre-selected Nasdaq composite index (COMPX) levels. When the index hits 2,515, Stewart sells call options on the shares in his portfolio to bring in extra income, rather than taking profits by selling the shares themselves.
Stewart explains, “By selling calls when the Nasdaq hits my selling target I have never had to deliver a share. [emphasis JDB’s] I have kept the cash I gained from selling the calls and [also kept] the shares when those options themselves expired worthless.” He goes on to say that, “This past year my covered-call options strategy has been working well, even as the market has continued to climb.”
Stewart sold long-term, out-of-the-money (OTM) calls last year. For example, in SEP 2006 he wrote $75 APR Calls on Devon Energy, which look set to expire worthless. He now thinks the better practice is to wait and sell calls at a market peak rather than writing deeply OTM calls. Though he did not enunciate it this way, by selling calls at a market peak (or strong resistance level), one does not need to sell calls quite so far OTM. In fact, if you were confident of a pullback, you could write ATM calls, or even ITM calls, relying on a pullback to make the ITM calls expire worthless. The further out in time, the larger the premium will be. Give the stock enough time to pullback, though, especially if the write is ITM.
Writing calls on portfolio stocks at market peaks or strong resistance levels is just one more of the seemingly endless ways traditional stock investors use call options to produce an income from a portfolio - just like fund managers do - but by no means the only technique.
Stewart noted in conclusion that, “Indeed, with a few of these [covered call] positions incorporated into your portfolio you’ve got your own hedge fund - without any of the exorbitant fees most hedge-fund managers charge.” I couldn’t have said it better.
If you own stocks, make them pay some rent! Thanks to my buddy and trader extraordinaire, David Skidmore, for a heads-up on this WSJ article.
March 2nd, 2007 at 6:40 am
I have written covered calls on DVN on a monthly basis. The stock moves quite a bit. The key seems to be remembering that this is for income and not to panic when the stock moves ITM near X day. I owned 150 shares and would write 2 calls. Unfortunately, my broker was slow to approve some of these transactions although I have level 5. msm