Covered Call with Index options?

Buying protective puts is a very bad choice in my opinion.  That turns your entire portfolio into the equivalent of owning call options. 

Beta is significant, but the best way to handle that is to choose the index that most resembles your portfolio.  You cannot get the same volatility as your portfolio, but you can try to find an index that will have a high correlation with yours.  That's one of the risks you will have to take.  The best hedge is to sell calls on each stock, but that costs more in commissions and if you own odd lots (not increments of 100 shares), it makes that impossible.

If you understand protective put strategy, then you know how the covered call strategy works.  Just as you buy 1 put per 100 shares, you would sell one call per 100 shares instead.

I understand that you want to sell index call option instead.  You can do that.  First determine the approximate value of the portfolio that you want to hedge.  This is the portfolio without those protective puts.  If you keep the puts, you would be converting that to a collar and would make different choices.

Next choose the index that most closely resembles your portfolio.  You can use S&P 500, or NASDAQ 100 or one of the Russell Indexes etc.

Choose to sell at the money options, or out of the money options, or in the money options.  For your purposes, I recommend ATM.
Look at the strike price.  Let's say it's 700.  That means selling one call option is appropriate for a portfolio worth $70,000. 
Thus,s choose the correct number of calls to sell against a portfolio of long stocks.

If that number is too high, then you can use some options on exchange traded funds, such as SPY (S&P 500), QQQQ (NASDAQ 100), IWM (Russell 2000) etc.
If the strike price is 82, then one call is the proper hedge for an $8,200 portfolio.

Your broker will consider the option sale to be 'naked' and may not allow it.  You can find brokers who do.

Just be careful not to sell more calls than your portfolio is worth - that gives you upside risk.

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On 1/22/2011 8:42 AM, wrote:
How is it possible to hedge a portfolio with Indexoptions
when to use the Covered Call Strategy? Do i have to go over
the Beta like it is done in the Protective Put Strategy?

Thanks for taking time

Kind regards


Mark D Wolfinger