Explore Your Options by Tom Gentile
COVERED CALLS FOR PROTECTION
I am concerned about the markets going forward and want to know if there is any way of protecting my stock portfolio using options instead of liquidating my position. I have heard of covered calls ó do they work as a good protection strategy?
Yes, you can protect your portfolio of stocks by using options. The first way a trader can help protect a stock
from falling hard is to sell option premium against the shares. This is known as covering your stock position, or a covered call. In a covered call trade, you are buying the underlying stock shares and selling call options against them. This strategy is best implemented in a bullish to neutral market, where a slow rise is anticipated in the market price of the underlying stock. This technique allows traders to handle moderate price declines, because the call premium reduces the positionís breakeven.