V.7:11 (416-417): Revamping mediocre buy-write strategies by Jerry Kopf

V.7:11 (416-417): Revamping mediocre buy-write strategies by Jerry Kopf
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Revamping mediocre buy-write strategies by Jerry Kopf

Stockbrokers usually introduce the average retail investor to option trading with a simplistic buy-write I strategy. Buy the stock and sell (write) a call option against it. The mechanics are straightforward. The seller or writer of the call option is establishing a contract with the purchaser of the call, promising to deliver shares of a stock at a certain price (the strike price) on a certain date (expiration date). The buyer pays the seller of the contract a fee (called the premium) to assume this risk. At expiration, if the stock is below the strike price, the seller of the call keeps the entire premium. However if the price of the stock moves above the strike price the seller has to deliver the stock to the buyer at the strike price.

In a market that stays in a trading range, the buy-write delivers decent results. Stockbrokers embrace it because it's easy for customers to understand and therefore simple to "sell." It generates multiple commissionsócommissions on both buying stock and simultaneously selling the call option.




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