Thanks Mark for your simple and straight forward explanation about covered calls. Having lost in the market through the buy and hold strategy, I now believe the best way to protect your capital and gain in the market over time is through covered calls.
Covered call writing is an excellent strategy.
Especially for those who are first learning about options.
But, it is not the 'best' strategy for most investors. (I don't
believe there is a single 'best' strategy. Each investor has different
needs and different methods simply 'feel' more comfortable to
My only concern is this: if you write a covered call, you still have downside risk to contend with, in case the stock (as is often the reality of the market, declines
rapidly). In your option, what is the best way to protect yourself? Could it be doing a collar trade or just put a physical stop loss at or just below break-even after taking into account the option premium?
You are correct. The 'flaw' in covered call writing is
that the downside has only minimal protection. It's better than no
protection, but for more coservative investors, it may not be enough
The collar is my choice for such investors. Converting the covered
call to a collar by purchasing an out of the money put option provides
the insurance you want. Most of the time the put is going to expire
worthless - but when it's needed it can make a big difference. If your
goal is to accumulate wealth over time and not to make a killing in the
market this week, collars will work for you. (I don't like using stop
loss orders when you have stock and option positions that are tiedd to
each other - but that's my choice. It doesn't have to be
But, to own a collared position, there is no need to buy stock, sell
calls, and buy puts. You can adopt positions that are equivalent.
That means same risk, same reward, but easier to trade. Two positions
are equivalent to the collar: sell a put spread or buy a call spread.
You must use options wth the same expiration date as you would use for
the collar. You must also use the same strike prices. Thus, if you
plan to buy stock, sell May 65 calls and buy May 60 puts, the
equivalent position is:
a) Buy May 60 calls, sell May 65 calls or
These methods, and a detailed explanation of how to use them are
the basis for my new book, The Rookies Guide to Options. How
to manage risk also plays a large role in the book.
b) Sell May 65 puts, buy May 60 puts.
Thanks in advance for you insight.
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options