The covered-call writing strategy is agood, conservative strategy for thephysician-investor, although, as with anyinvesting strategy, it has risks. If youchoose to use this strategy, remember thateach stock in your portfolio requires a separatedecision. It isn't necessary to sell acall against each of your stock holdings. Infact, you should gain experience with thisinvestment method by adopting the strategyfor only 1 or 2 of your positions, andthen gradually increasing the number asyou become more comfortable and moresatisfied with the results.
WHAT DO YOU LOOK FOR?
When doing research on stocks to buy,remember to determine typical prices forthe options on those stocks. Those priceshelp determine if that particular stock is agood candidate for the covered-call writingstrategy. Option prices are availablefree on the Internet or from your broker.
Short Book on Options
There is much to learn about the covered-call writing strategy. For example,you must determine which of the severalavailable strike prices to choose when sellingthe call. You must also determinewhich of the 4 possible expiration monthsto select. There is no single best option tosell, and each physician-investor canchoose the option that makes them comfortablewith their position. How to makethese decisions is discussed in detail in ($13.95; 1st BooksLibrary; 2002). The purpose of this article isto introduce you to the topic of stockoptions and to try to convince you to seriouslyconsider modifying your currentstrategy. Additional information aboutcovered-call writing is available from yourlibrary, bookstore, or broker.
WHAT'S RIGHT FOR YOU?
The recommended strategy requiresyou to be diligent when selecting stocks tobuy. By selling covered calls against yourstock holdings, you give up the chance tomake a killing on any 1 stock, but in returnyou have a much better chance to show aprofit for each of your stocks. Those additionalprofits add up over time and canmake a significant contribution to yourfinancial health. As a bonus, you're able togain some protection for your portfolio, incase your stocks decline in price. This is aperfect strategy for a retirement account,in which profits can grow at a taxdeferred,compounded rate.
Discuss this idea with your financialadvisor or broker. Be aware that some professionalinvestment advisors do notunderstand options as well as you do (nowthat you have read and understood thisarticle), and may be reluctant to adviseyou to adopt this strategy. They may evensuggest you would be making a mistake toconsider using options.
Don't be easily intimidated. You areentitled to an advisor who does understandoptions. If your broker is reluctantto speak with you about options, or ifthey try to steer you away from options,ask the branch manager of your brokeragehouse to recommend another brokerwho does understand options andwho is receptive to your adopting a conservativeoptions strategy. The managerdoes not want to lose your business andshould accommodate you.
An alternative is to open a second accountwith a broker who understands thepower behind using options in a conservativemanner. Give them your covered-callbusiness and maintain your buy-and-holdbusiness with the original broker.Eventually you may be able to consolidateyour accounts. If you currently usean online broker and make investmentdecisions without professional advice,there is no reason why you should not beable to continue doing the same withoptions. If you have a basic questionabout getting started with options, yourbroker ought to be able to assist you.
A final thought:
Although covered-callwriting is a conservative strategy, as withany situation in which you are invested inthe stock market, losses can occur.
Mark D. Wolfinger, author of
The Short Book on Options: A
Conservative Strategy for the Buy
and Hold Investor, is an educator
of public investors. He was a
professional options trader at
the Chicago Board Options Exchange for over
20 years. He welcomes questions or comments
at firstname.lastname@example.org. For more
information visit www.mdwoptions.com.