COVERED WRITES

o Most common options strategy in use

o Can be used to increase the rate of return of a position o Reduces downside risk by reducing capital tied up o Can be used to sell a position when waiting for a rally

2 possible outcomes:

o Underlying is above the strike of the call and the option is assigned Underlying is below the strike price and the option expires worthless giving you opportunity to sell again in a further out month Flexibility to close the position in advance if: o Your expectations for the underlying have changed and you want to sell it at its current market price o You upwardly revise your target for the underlying

3 things to keep in mind:

o Your satisfaction with the effective selling price Underlying could reach target and fall back by expiration o You need to cover the short call if you want to sell future ahead of time-possibly at a loss-or maintain the risk of uncovered calls