Consider Covered Calls – And The Caveats by Kevin Lund
Are there opportunities lurking in this market for
you to take advantage of covered calls?
Some strategies work only under
certain conditions and, all too often,
not for the right reasons. Selling
covered callsÝ is a good example.
There were a lot of selfproclaimed
in the late 1990s who did nothing more
than sell covered calls on technology stocks,
pulling in wonderfully ridiculous returns of 20–
30% or more per month. Each month brought call
sellers (writers) two sources of income: capital
appreciation on the stocks they bought, and premiums
from the calls they sold on those stocks.
But within about one year of the emergence of the
bear market in the spring of 2000, it became
alarmingly apparent that covered calls spelled
disaster for most and did little to protect those
“geniuses” from the sharp declines in their stocks
as well as their trading accounts.
If this is so, why bring up covered calls now?
Whether you think we’re in the midst of a “minibull”
in a larger bear market or the beginning of a
new long-term bull market, it’s a ripe environment
for covered calls. However, there are some
new rules to keep in mind.