V. 22:2 (30-32, 34): Consider Covered Calls – And The Caveats by Kevin Lund

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 bull-market geniuses” 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.