Managing A Covered Call Portfolio
A covered call portfolio is more complicated to manage than a stockportfolio, but a few simple calculations and basic guidelines can makeits management a whole lot simpler. In this article, we show you how todecide when to hold your covered call, when to roll the call and whento close both the stock and the call.
Why a Covered Call?
Coveredcall writing is a bullish, premium selling, strategy. That is - youwrite a covered call because you expect the stock to go up and becauseyou believe the premium is overpriced. By writing the call andcollecting the premium, you give up some of the stockís upsidepotential, since you agree to sell the stock at the strike price.
Attractivecovered calls can be found anywhere on a continuum from higher-strikeout-of-the-money covered calls that are aggressively bullish and offeronly a modicum of downside cushion to lower-strike in-the-money coveredcalls that offer a well below the current stock price but virtually noprofit potential beyond the time value of the call.
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Looking at Your Portfolio
Whetheryou initially write a covered call that is at-the-money, in-the-moneyor out-the-money, you do so because the combined position offers you anattractive package of potential for profits and downside protection.
However,as time passes and the stock and the call change in value, your coveredcall loses either its potential for gains or its usefulness as downsideprotection. The trick to managing a covered call portfolio is tomonitor your positions and look for signals of when it is time to rollor to close your positions.
Continued In Part Two...
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About Lawrence D. Cavanagh
Lawrence D. Cavanagh is Editor (and Senior Analyst) of The Value Line Daily Options Survey. The Value Line Daily Options Survey offers evaluations and rankings on virtually the entire universe of regularly listed equity and ETF options, using the Value Line common stock ranks and proprietary volatility forecasting methodology. Before joining Value Line in 1991, Mr. Cavanagh was an options strategist for Capital Market Technologies (subsidiary of Elders Finance), helping design long-term synthetic foreign currency and gold option hedges. Before that, he was Director of Foreign Currency Options for the Chicago Board Options Exchange. Other work experience includes Dean Witter Reynolds (VP, Senior Currency Analyst), European American Bank (Director of Currency Forecasting) and the Federal Reserve Bank of New York (Assistant Economist).
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