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2000issue C011-4

Covered-call income and assignment flexibility

A covered call sells a call against stock already owned so an exercise can be met by delivery. The archive sets extra income, a target sale, and a limited downside cushion as the reasons to write, then shows when to buy the call back, accept assignment, or sell puts to repurchase the same name.

  • Covered call writing sells a call against stock already owned so that an exercise can be met by delivering that holding.
  • The archive lists three motives: extra income when little near-term upside is expected, a target sale above the current price, and a limited cushion if the stock falls.
  • If the stock rises beyond strike plus premium received, buying the call back costs more than the premium collected, so the overlay underperforms an unoptioned long stock position.
  • The archive advises against writing calls on a very-low-basis holding when assignment would create an unwanted tax event, and favors writing only when listed options exist, look fairly priced, and are large relative to commission.
Entries in this reading3 entries
Current trackCovered call writing31 readingsOption income strategy43 readingsOption premium analysis47 readings

A call against stock already owned

Covered call writing is defined as selling a call against stock already owned so that an exercise can be met by delivering that holding.

The archive lists three motives for selling calls on owned stock: extra income when little near-term upside is expected, a target sale above the current price, and a limited cushion if the stock falls.

Keeping the shares or accepting the call

In a worked path, stock bought near 33 with a 35-strike call sold for 2.50 can still be kept at expiration by buying the call back. Economic value is similar to letting the shares be called.

If the stock rises beyond strike plus premium received, buying the call back costs more than the premium collected, so the overlay underperforms an unoptioned long stock position.

An option income strategy after assignment

A follow-on procedure after assignment is to sell slightly out-of-the-money puts until the same name is put back. Repurchase is treated as acceptable because the stock was already wanted.

When the archive would not write

The archive advises against writing calls on a very-low-basis holding when assignment would create an unwanted tax event. It favors writing only when listed options exist, look fairly priced, and are large relative to commission.

Covered-call premiums are described as most attractive when options are overpriced, which the archive associates with unusually high market volatility such as a correction.

Option premium analysis of two October strikes

A strike only 4 percent above the then-current stock price is treated as having a material chance of being reached, because that gap is much smaller than one standard deviation in the example.

In the October 75 versus October 70 comparison, commission of about 0.20 per share plus a 0.18 bid gap left expected October 75 income near 0.87, so the October 70 was preferred.

Live quotes showed the October 70 bid 0.02 below the theoretical value and with substantial volume. The example trade was the October 70 rather than the missing or thinner 75 strike.

October TLAB covered-call premiums by strike

With Tellabs at 62.50 dollars on 4 September 1999, theoretical October premiums fall from 6.22 dollars on the 60 strike to 1.25 on the 75. The 70-strike mid of 2.26 dollars is the income-versus-assignment compromise the authors wrote. These figures are the calculator prices on the option sheet, not live prints.
With Tellabs at 62.50 dollars on 4 September 1999, theoretical October premiums fall from 6.22 dollars on the 60 strike to 1.25 on the 75. The 70-strike mid of 2.26 dollars is the income-versus-assignment compromise the authors wrote. These figures are the calculator prices on the option sheet, not live prints.TLAB · 40 days to October 1999 expiration · 1999-09-04T00:00:00.000Z to 1999-10-14T00:00:00.000Z

Calculator snapshot dated 4 September 1999; the October series has 40 days to expiration. Each cell also printed a bid-ask increment that is not plotted.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
6 of 25 in the Covered call writing track
20021-2 pp.Next on Covered call writingCovered-call expiration rate versus expected valueA high worthless-expiration rate was treated as support for a higher seller win rate, not for higher aggregate profit.
All readings on this track · 25 readings
  1. 1995Sequenced covered-call repair after a growth-stock drawdown
  2. 1996Covered-call writing as income and assignment discipline
  3. 1997Relative volatility rank for covered-call overlays
  4. 1997Covered call time, probability, and implied volatility
  5. 1999Covered-call income when implied volatility is cheap
  6. 2000Covered-call income and assignment flexibility
  7. 2002Covered-call expiration rate versus expected value
  8. 2003Covered-call versus diagonal housing after a single-name drawdown
  9. 2003Covered-call overlay on a stock portfolio as a payoff case study
  10. 2003Ratio backspread and covered-call assignment construction
  11. 2004Covered-call income is not a safety net
  12. 2006Evaluating consecutive covered calls across market regimes
  13. 2007A job-first audit of commodity options in a futures book
  14. 2011Horizon checks on Covered call writing, the risk-reward ratio, and the Relative Strength Index
  15. 2012From ex-date verticals to leftover buy-writes, and a call backspread that stays net long
  16. 2013Year-long covered calls on high-yield industrials
  17. 2014Year-horizon covered calls on Dow yield ranks
  18. 2014Covered-call premium as a cost-basis cushion
  19. 2014Monthly buy-write construction with traffic-light exits
  20. 2017Low-volatility covered calls need a real premium buffer
  21. 2017Covered-call futures income as one testable procedure
  22. 2018Partial covered-call overlays at targets, resistance, and rich volatility
  23. 2019Weekly covered-call writing as a two-book credit-spread case
  24. 2019Weekly option income as one holding-period case
  25. 2019Locking long-call profit with a temporary overlay
By fieldOptions and volatility171 readingsBy year200059 readings
All 31 readings tagged Covered call writing
Also on Covered call writing5 readings
1995Sequenced covered-call repair after a growth-stock drawdown1996Covered-call writing as income and assignment discipline2003Covered-call overlay on a stock portfolio as a payoff case study2006Evaluating consecutive covered calls across market regimes2014Covered-call premium as a cost-basis cushion