Chap 2 Covered Call Writing Flashcards
Conservative Covered Call Write
Selling a call option while simultaneously owning the obligated number of shares of the underlying stock
Downside Break-Even Point
Stock price minus call price
Incremental Return Concept
Strategy of rolling up for to a predetermined target price then allowing the stock to be called away
Net Price
The cost of a covered writing position, subtracting the call price from the stock price
Rolling Down
Buying back a call and selling a longer-term call with the same striking price
Rolling Forward
Buying back a call when the stock price drops then selling a call with a lower striking price
Rolling Up
Buying back a call when the stock price rises and then selling a call with a higher striking price
Total Return Concept
Strategy of writing calls near the striking price to achieve the best balance between maximum potential return and downside protection
What is the primary objective of covered writing
To increase profit through stock ownership
Combined Write
Writing half of the position against in-the-money and half against out-of-the-money on the same stock
Rolling down generally reduces the BLANK of the postion?
Max profit potential
Simultaneously buying one call and selling another results in a BLANK postion?
Spread
The key to successfully implementing the incremental return strategy is to?
Roll for credits
A covered call write generates a loss when?
The stock falls by a distance greater than the call option premium
The downside break-even point for a covered write is?
Stock price minus call price
A covered write will outperform owning the outright stock in what situation?
All if it goes up down or stays the same
Before taking a position an investor should compute
return if unchanged, downside break-even point and return if exercised
What are the downsides of rolling up?
Downside break-even point is raised, debits are incurred and loss potential is increased -++++++
The total return strategy of a covered write?
With an out-of-the-money option you are ultimately betting on an increase in the stock leveraged stock ownership
Where as with an in the money covered write you are taking a total position to benefit off of an increase in the stock price and the premium and can make money in any circumstance
For the total return you need to consider the max profit potential as well as the downside protection and be willing to have the stock called away if necessary to meet returns
When selling far out of the money options in a covered write you are ultimately using a stock ownership not covered write strategy
