The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

Question 106—Writing Covered Options

Answer 4 Covered writing requires large capital

If the stock stays relatively flat and does not reach the option’s exercise price, you will pocket the premium, boosting your total return. If the stock falls, you will also pocket the premium, cushioning the fall of your stock. If the stock rises above the option exercise price, it will be called away. You’ll keep the premium in addition to the capital gain from the purchase price of the stock to the exercise level. Since there is a big universe of interesting stocks, you can take your freed-up capital and look for new opportunities. The fact that one needs substantial capital to purchase shares against which to write options in a large enough size to make financial sense, prevents most traders from getting into this business.