The Art of The "Covered Call"---the "Grandmother's Option"---

Covered Call Writing is called the Grandmother's Option, because it is so conservative---one is in the "Banker's positon" versus a gambler. The odds for the astute trader can be quite high for success. It does take practice to get the swing of it however.

Consider the following example.; You have bought 100 shares of AAPL at 130 and it has risen to 190. You really do not want to sell, but on the other hand, you would like some income from the investment. You are older and in a perfect world you could get excellent income and then leave the stock for the grandkids. You bet that in the summer doldrums it will not move higher. After all---it has risen from 130 to 190 in just months. You remember the famous "bathing suit rule"-----when summer approaches, the traders are thinking of what? bathing suits. As anyone who has been to Wall Street is aware of---when Friday comes, most have left town to sail in cooler lakes. Trading volume is usually low.

You also know that the summer quarter is the slowest for high tech stocks usually----and you have noticed that few people are on their computers in the heat of the summer. And that translates to low purchases of tech stuff and that in turn might translate into lower earnings.

So---you look at the call option table.: (May 22, 2008


You decide that selling the July 200 Call priced at $540 is attractive ---ie at the strike price of $200 or if Apple stocks gets to 200 between now and July 18 you would sell it for $200 and keep the $540 or buy back the call, which would cost say for example purposes, $800.

The way this works ideally is that Apple stock holds even or drops and the call price gradually drops to zero or you buy it back for $50 say and then repeat the process, and sell a call for october 2008 for another $500----This process creates continuing income and hence provides a method of a senior who does not want to cash in one's "chips" and suffer the capital gains from such a huge capital gain, to get continuing monthly income.

As an investor, you are saying "Show Me" to the market optimists---show me that the market can move higher in the current situation of rising commodity prices and rising unemployment and recession. The covered call writer is the essence of the conservative investor.

Stay tuned for another episode of the Traders little black book which will cover "Short Interest---and why it is not interest in short people. Stay tuned.