WHAT IS THE OBJECTIVE FOR A COVERED-WRITING PROGRAM?
The first objective is to lower risk (as measured by the variability of returns) by reducing the carrying cost for the stock. For example, selling a six-month at-the-money call option for $10 on a stock trading at $100 reduces the stocks effective cost by 10 points, to $90, and thus cushions the impact of a decline in the share price. The second objective is to efficiently capture an options time premium its total price minus its intrinsic value (the amount by which the current stock price exceeds the strike price). The time premium represents the amount a speculator is willing to pay for potential price appreciation in the stock and reflects the stocks expected volatility over the life of the option. The price of an at-the-money or out-of-the-money option consists entirely of time premium. WHAT RETURNS SHOULD ONE EXPECT FROM A COVERED-WRITING PORTFOLIO? This strategy performs best in moderately appreciating equity markets with volatile trading ranges where investors tend to overpay fo
