V.8:6 (216-217): Avoid the call-writing hazard by Jerry Kopf

Avoid the call-writing hazard by Jerry Kopf

An option may sometimes be a good buy. Other times it may be a good sale. Sometimes you should buy long term, sell near term. Sometimes the opposite should be done. To participate in the market without the ability or flexibility to use different option strategies that address different market conditions is bound to cost money in the long run. — Jim Piper

A gentleman from Detroit called recently to find out the feasibility of squeezing a bit more income from a $600,000 portfolio of long-held common stocks. As its trustee he was pleased with each stock's growth but dissatisfied with the average dividend income of about 4%. He felt strongly that the beneficiaries of this trust should be getting a greater yield and wondered if writing call options — as these were all optionable stocks — was the answer.

The trust held shares in Texaco, Sears, IBM, DuPont, Syntex, Procter and Gamble and other blue chips. Conventional wisdom dictates that more income would accrue if calls were written on a regular basis. In fact, the covered write is the standard fare offered by the average retail stockbroker. I pointed out that such a simple writing program was really an ointment with three flies.