Explore Your Options  |  MAY 2004

Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile COVERED CALLS If I write a covered call for a stock I bought at 30.50, am I allowed to place a stop-loss price, say, 27.00, to protect it from further decline? What happens if the stop-loss price is triggered? Although one of the components of a covered call is the underlying stock, it is still a spread, since it contains a combination of both a long and a short position. Most brokers do not place stop orders on spreads. However, you can probably place what is known as a contingency order, in which the spread is sold based on the stock price alone. If, for example, you decide that you wish to sell the spread when the stock hits 27, the contingency order will automatically sell your spread at the price you specify or at the market. But again, this is up to each individual broker and is something you should ask about.

by Tom Gentile