V.3:6 (207-207): Covered calls by Richard Maturi

Covered calls by Richard Maturi

Sophisticated and neophyte investors alike can benefit from option trading. Though options are typically viewed by many investors as speculative, options can be a very effective conservative investment tool.

A stock option gives the holder the right to buy or sell the underlying security at a specific price during a specific period of time. A call option provides the right to buy the specified stock, while a put option provides the right to sell the specified stock. The exercise price of the option is called the "striking price."

The "covered call" option is a conservative vehicle that should not be ignored by any investor. A covered call is a call written by the owner of the stock.

Call options are purchased with the anticipation that the underlying stock will rise in value in excess of the premium paid for the call. When this happens the holder can sell the call for a higher price or he can exercise the option and take possession of the stock at a price less than current market value, either way enjoying highly leveraged gains.

There are a number of advantages to writing covered calls.