There are a number of key benefits and features to a covered call option writing investment program and a put option writing investment program, and an uncovered put and call combination writing program. These include the following:
COVERED CALL WRITING
1. Additional Income: Writing covered call options can provide you with an ongoing stream of premium income from your stocks. This is particularly important at a time when most common stocks, mutual funds and ETFs either pay no dividend at all or provide a very meager return on investment.
2. Income Paid Up Front: The premium received from writing call options is credited to your account the next day, creating immediate cash flow that can be reinvested to produce more income or can be withdrawn from your brokerage account for any use.
3. Predetermined Return: The immediate and annualized returns from call option writing can all be evaluated prior to initiating the investment position. You will know what the premium income will be and the maximum additional capital appreciation opportunity if your stock is called away at the strike price.
4. Risk Reduction: If a stock declines, the premium you received helps to offset some, or all, of the decline in stock value. Writing covered calls acts like an insurance policy offering some downside protection when a stock declines in price.
5. Cash Dividends: Since you, as an option writer, own the stock and have only sold an option, you will continue to be entitled to any cash dividends for as long as you own your stock.
6. Fungibility: Exchange-listed options are fungible. That is, each listed option with a common expiration date and exercise price is interchangeable with any similar listed option. This enables investors to initiate and close out a position by simply reversing the transaction (buying to close) in the open market through their brokerage account. Fungible option contracts became available in 1973.
7. Ease of Trading: Since options are actively traded on the open market, call options can be easily written and bought back, similar to trading stocks. With the assistance of our book, this is readily accomplished yourself through online or phone trading through a discount brokerage account or through a full-service broker..
8. Diversification of Stocks for Option Writing: There are a huge number of stocks within a broad array of industry groups to select for covered call writing opportunities. Some of the stocks pay large dividends, while some pay none at all. Exchange Traded Funds that achieve broad diversification by mirroring large portfolios of stocks are becoming more and more available. Writing covered calls is possible on some of these ETFs and will lkely become more widely available in the future.
9. Diversification of Expiration Dates and Exercise Prices: Options usually have four or more possible expiration dates to choose from. In addition, LEAPS (Long-Term Equity Anticipation Securities), which are options on selected underlying stocks with expirations of up to three years at the time of listing, are also available on many stocks.
10. Cash or Margin Account: Covered call options may be written either in a cash or a margin account (cash only for retirement accounts).
PUT OPTION WRITING
1. Additional Income: Writing put options can provide you with an ongoing stream of put writing income. This is particularly important at a time when most common stocks, mutual funds and ETFs either pay no dividend at all or provide a very meager return on investment. The put writing income can significantly enhance total returns in a flat, slower growth or a modestly declining stock market. Even in a more rapidly growing market, you will still achieve your target investment return.
2. Income Paid Up Front: The premium received from put writing is credited to your account the next day, creating immediate cash flow. Since the put writing income is paid up front, if the income is reinvested it can serve to enhance the overall return on the original investment.
3. Opportunity to purchase stock at a lower price: Puts should only be written on stocks and ETFs that you would find attractive to own at a price you specify, as you may be called upon to purchase the shares subject to the put options should the price decline. Since this program primarily involves the writing of out-of-the-money puts, you would purchase your shares at a lower price than was available to you at the time the puts were written.
4. Predetermined Return: The immediate and annualized returns from put option writing can all be evaluated prior to initiating the investment position. You will know what the put writing income will be, how much in cash or securities you will be required to maintain in your account when the put options are written, and the investment you will make in the underlying shares if the market price falls below the strike price at expiration.
5. Fungibility: Exchange-listed options are fungible. That is, each listed option with a common expiration date and exercise price is interchangeable with any similar listed option. This enables investors to initiate and close out a position by simply reversing the transaction (buying to close) in the open market through their brokerage account. Fungible option contracts became available in 1973.
6. Ease of Trading: Since options are actively traded on the open market, put options can be easily written and bought back, similar to trading stocks. With the assistance of our book, this is readily accomplished yourself through online or phone trading through a discount brokerage account or through a full-service broker.
8. Diversification of Stocks for Option Writing: There are a huge number of stocks and ETFs within a broad array of industry groups to select for put writing opportunities.
9. Diversification of Expiration Dates and Exercise Prices: Options usually have four or more possible expiration dates to choose from. In addition, LEAPS (Long-Term Equity Anticipation Securities), which are options on selected underlying stocks with expirations of up to three years at the time of listing, are also available on many stocks.
UNCOVERED PUT & CALL COMBINATION WRITING
1. Additional Income: Writing put and call combinations can provide you with an ongoing opportunity for a substantial double-option stream of put writing income (both a put premium and a call premium can be financed through a single margin requirement). This is particularly important at a time when most common stocks, mutual funds and ETFs either pay no dividend at all or provide a very meager return on investment. The combined option writing income can significantly enhance total returns in a flat, slower growth or a modestly declining stock market for those investors willing to assume the additional risk inherent in the uncovered call component of the combination.
2. Income Paid Up Front: The premium received from combination writing is credited to your account the next day, creating immediate cash flow. Since the option writing income is paid up front, if the income is reinvested it can serve to enhance the overall return on the original investment.
3. Opportunity to purchase stock at a lower price: The put component of the combination may provide the opportunity to purchase shares at a lower price if the market price of the underlying closes below the strike price at expiration. Puts should only be written on stocks and ETFs that you would find attractive to own at a price you specify, as you may be called upon to purchase the shares subject to the put options should the price decline. Since this program primarily involves the writing of out-of-the-money puts, you would purchase your shares at a lower price than was available to you at the time the puts were written.
4. Predetermined Return: The immediate and annualized returns from the put and call option writing can all be evaluated prior to initiating the combination positions. You will know what the writing income will be, how much in cash or securities you will be required to maintain in your account when the options are written, and the investment you will make in the underlying shares if the market price falls below the strike price at expiration. The unique risk in combination writing rests with the uncovered call position, as the loss is theoretically unlimited, although is limited as a practical matter.
5. Fungibility: Exchange-listed options are fungible. That is, each listed option with a common expiration date and exercise price is interchangeable with any similar listed option. This enables investors to initiate and close out a position by simply reversing the transaction (buying to close) in the open market through their brokerage account. Fungible option contracts became available in 1973.
6. Ease of Trading: Since options are actively traded on the open market, put and call options can be easily written and bought back, similar to trading stocks. With the assistance of our book, this is readily accomplished yourself through online or phone trading through a discount brokerage account or through a full-service broker.
8. Diversification of Stocks for Option Writing: There are a huge number of stocks and ETFs within a broad array of industry groups to select for combination writing opportunities.
9. Diversification of Expiration Dates and Exercise Prices: Options usually have four or more possible expiration dates to choose from. In addition, LEAPS (Long-Term Equity Anticipation Securities), which are options on selected underlying stocks with expirations of up to three years at the time of listing, are also available on many stocks.
