Five Benefits of Covered Call Writing

By: Dan Keen

The following is an excerpt from Dan Keen's Covered Call Writing: A Low Risk Cash Flow Money Machine

All stock market and options market trading involves the risk of the money that is at play. However, here are five huge benefits of covered call writing that you may wish to consider.

Benefit #1: If you buy a stock on the stock market, and that stock does not go up in price, you don’t make any money, unless it pays a dividend. In fact, if you hold that stock for a very long time, you are actually loosing money, because that money could have been invested in a different stock or in a savings account, money market, certificate of deposit, or mutual fund, where it would have generated interest or created growth. In addition, you have to pay a commission to buy stock, so you would actually be a few dollars in the hole.

If a stock you buy goes down in price a little, then you lose money, and there isn’t much you can do to recoup your loss, except to hold onto it and hope is goes up. You could lose some of the money you invested in addition to the cost of the commission fee to purchase the stock. The only thing you have going for you is that being a stock owner, there are no time constraints. Your loss is only on paper until you actually sell the stock; so, you can hold the stock and hope it eventually recovers.

Using the strategy of writing covered calls, you make money when your stock price goes up and when it goes “sideways.” If the stock drops a little, you might break even. If it drops a lot, the premium you received will at least reduce the price you paid for the stock. If you paid $11 for a stock and received $1 as a premium, the stock actually only cost you $10.

Benefit #2: Writing a covered call is like buying the stock at a discount! The more covered calls you do on a stock (doing one every month or two as long as you own the stock), the cheaper your cost per share. 

Benefit #3: Another benefit to writing covered calls is that it requires very little “baby sitting.” Checking your stock once a day is usually sufficient monitoring to determine if any action on your part is needed, namely buying back the call and selling the stock should the stock begin a major move.

Benefit #4: Writing covered calls allows us to take advantage of the time value erosion of options. The time value part of an option shrinks as the expiration date is approached.

Benefit #5: A trader’s worse enemies are fear and greed. The plan to write covered calls eliminates much of the emotional pitfalls that arise in other strategies. Once we implement a covered call position, there will usually be no decisions required where emotions could enter the equation. There are times, however, when an extreme movement in the underlying stock will necessitate a decision to possibly terminate the option position. But for the most part, writing covered calls will simply require patience, waiting for the expiration date to arrive, at which time the stock and its options can be reevaluated.