Explore Your Options  |  AUG 2002

Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile COVERED CALLS FOR PROTECTION I am concerned about the markets going forward and want to know if there is any way of protecting my stock portfolio using options instead of liquidating my position. I have heard of covered calls — do they work as a good protection strategy? Yes, you can protect your portfolio of stocks by using options. The first way a trader can help protect a stock from falling hard is to sell option premium against the shares. This is known as covering your stock position, or a covered call. In a covered call trade, you are buying the underlying stock shares and selling call options against them. This strategy is best implemented in a bullish to neutral market, where a slow rise is anticipated in the market price of the underlying stock. This technique allows traders to handle moderate price declines, because the call premium reduces the position’s breakeven.

by Tom Gentile