DERIVATIVES Covered Call Writing Here's a primer on writing options to boost return on investment. by Steven P. Schinke, Ph.D. Options derivatives for stocks and commodities come in two types: One is bought and sold in transactions between two parties directly, while the other is traded on exchanges. The first, over-the-counter (OTC) options, are often complex in their mechanisms and pricing, and so are negotiated between institutions with counterparty backing. Because of their singular properties, OTC options are usually not transferred. In contrast, exchange-traded options are priced in a public market, can be transferred and are not negotiated between the originating and purchasing parties. The most familiar exchange-traded options are calls and puts, available on thousands of equities and on most futures. Call options allow the bearer to purchase an issue (equity or commodity) at a preset price within a prescribed time frame. Put options allow the bearer to sell an issue at a preset price within a prescribed time frame. (To remember these differences, consider that when you buy something you "call" it away from the seller; when you sell something you "put" it to the purchaser.) Calls and puts carry values based on price and volatility of underlying issues, prevailing interest rates and time remaining in the option's life. The price of those values, referred to as premium , is set in a conventional bid and offer. |
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