The Covered Call---the grandmother's option

Ed.note: The following is just a reflection and not a recommendation or advice in any way.)

Option trading is for the few. I say that even though in today's media pronouncements on options, mostly hyped by the options exchanges themselves, one would think that anyone who could lift a beer glass could also trade options. From my experience, options are for the young, the wealthy, and those with steel cold nerves.

As a person who was licensed in options, I quickly realized my background of midwest conservatism did not qualify me as an extreme risk taker. Yes. There was the thing about steel nerves, and even yes...age. Anyway. I wanted a way to learn about options and the way to do that was "The grandmother's option, or formally, "The covered call."

One trainer explained it me this way: On the opposite of every trade is a different risk. On the other side of the gambler is either the banker or the "grandmother." In the covered call, you are the grandmother. It is a calculated conservative risk. Yet it can be played aggressively and one can get the sense of the fast paced world of options.

The first part of the investment is the stock. You own the stock. Hopefully, you own it bought at a lower price. And it is a high quality stock. That is key. If it is a stock with three letters----it is a New York stock and that always meant higher liquidity for me. Another part of the game is that is is fun if the stock is one where there is some mystery about the future--maybe a buyout or such. And maybe there have been recurrent rumors over the past years, and the stock has spiked up and then down. When the stock has gone down, you buy the stock. And when it spikes up, you sell the covered call and get some money for the call. Then you buy the call back when the stock comes down and pocket the difference, or just let the call expire. For every call option there is a strike price and a month and year. Time and price interact daily on each call value.

The effect of playing with covered calls is kind of like riding a surf board. One has to judge the waves and time the transactions. You are never betting the farm on any transaction.

So. If you are conservative. And if you are not a wild gambler. You may have the temperment for the covered call. Any options exchange booklet can explain the details. Enjoy.