Options  |  NOV 2001

Overbought/Oversold, With Covered Calls by Austin Passamonte

Overbought/Oversold, With Covered Calls by Austin Passamonte Knowing when to buy and when to exit or how to protect equity plays is basic for long-term prosperity. Here is one way to do it using covered calls. Every stock trader should be ready and willing to write covered calls. They are a powerful tool for locking in partial gains and/or reducing cost basis. By the same token, writing covered calls as a specific trading method also holds great merit. Let’s explore some scenarios for such tactics and see if they might add to your personal equity curve. MECHANICS OF TRADING COVERED CALLS Option contracts are actively traded for literally thousands of listed stocks, sectors, indexes, and exchange-traded funds such as iShares† and HOLDRs†. Simple tactics for hedging, investing, and/or locking in profits have never been more available or diverse. Here’s a simple rule: Never write a covered call on a share you don’t want to own. Covered call writing is a neutral to bullish strategy, but markets can always quickly turn bearish. If that happens, you should not be stuck holding anything you are not content to keep.

by Austin Passamonte