Mark: Great job explaining options. I think a few things need to be addressed re this subject: The majority of stockbrokers, yes STOCKBROKERS either do not understand covered call writing or are jaded by option buying to begin with. As a result, they tell their customers to stay away from options period. Also, a lot of them, especially the younger ones think the commissions are not enough and/or do not give the broker the wherewithal to get the customer to trade as frequently (aka churn) if his money is "tied up" in covered calls. The second thing is dividends. When coupled with dividends, covered calls are that much more enhanced(eg MO). The third thing is that covered call writing (unlike option buying) is an accepted practice in an IRA account so it has to be considered what I like to call "conservative by association". And finally, covered calls are further enhanced by the utilization of margin. In fact, it is the only time margin is recommended. Consider your rate of return on a covered call earning several premiums a year plus a decent dividend rate and now utilizing margin money at say 6, 7 or even 8%!! Jimmy.


Jimmy,

Thanks for the kind words.

I could not agree with you more. Some stockbrokers steer their customers away from options, for no good reason. there is even one brokerage firm (nameless) that does not allow any options trading. Period. Very shortsighted.

Why is this true? I believe too many brokers gave very bad advice and their customers and lost huge sums writing naked options just before the crash in Oct 1987. Too many brokers wound up in arbitration and the firms decided that the simple path would be to avoid options altogether. A real shame, for options not only help investors reduce risk and increase returns, they also represent a great income stream for brokers.

One thing about margin: you are not allowed to use any margin in retirement accounts.

Mark