Separately Managed Accounts
COVERED CALL WRITING BASICS
Investors owning, without restriction, a widely held, publicly-traded security can choose to write a covered call against the position as long as an options market exists for that stock.
- A call is a listed option that gives the buyer the right (without obligation) to buy the underlying shares at a stated “strike price” on or before the option’s maturity date.
- The seller (“writer”) of a call receives a cash premium when the option is sold and has the obligation to sell shares at the strike price, at any time on or before maturity. Each premium puts income into the seller’s pocket.
When the seller owns the underlying security against which the option is written, the sale is a covered call write, which is considered a hedged transaction because the seller is “long” the security and “short” the option. If the security’s price exceeds the strike price and is called away, the covered writer can deliver the long position at little or no loss or out-of-pocket cost. However, the writer sacrifices any price gains above the strike price.
Although advisors, and many investors, have the ability to write covered calls, most are not very successful executing strategies on their own. Specialized knowledge and experience are required to:
- Know when options are attractively priced, relative to their value
- Choose the best strike prices for pursuing a personal investment objective
- Trade or “roll” options before maturity, to maximize their “time decay” value
- Avoid portfolio disruption and adverse tax consequences
A disciplined Covered Call Writing Strategy is designed with an investment advisor who clearly understands each client’s objectives allowing for a customized solution. The Strategy is then professionally implemented, day-to-day, by a Specialist Manager who focuses on analyzing the options market and executing options trades on a timely, cost-efficient basis.