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Advantages and Limitations of writing covered calls

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Advantages of Covered Call Writing
One of the best features of writing covered calls is that it can be done in any kind of market, although doing so when the underlying stock is relatively stable is somewhat easier. But writing covered calls is an excellent method of generating extra investment income when the markets are down or flat. If Harry in the above example were to repeat this strategy successfully every six months, he would reap thousands of extra dollars per year in premiums on the stock he owns, even if it declines in value. Covered call writers also retain voting and dividend rights on their underlying stock.
Limitations of Covered Call Writing
In addition to having to deliver your stock at a price below the current market price, getting called out on a stock generates a reportable transaction. This can be a major issue to consider for an investor who writes calls on several hundred or even a thousand shares of stock. Most financial advisors will tell their clients that, while this strategy can be a very sensible way to increase their investment returns over time, it should probably be done by investment professionals, and only experienced investors who have had some education and training in the mechanics of options should try to do it themselves. There are other issues to consider as well, such as commissions, margin interest and other transaction fees that may apply. Covered call writers are also limited to writing calls on stocks that offer options, and, of course, they must already own at least a round lot of any stock upon which they choose to write a call. Therefore, this strategy is not available for bond or mutual fund investors.

Advantages of Covered Call Writing

One of the best features of writing covered calls is that it can be done in any kind of market, although doing so when the underlying stock is relatively stable is somewhat easier. But writing covered calls is an excellent method of generating extra investment income when the markets are down or flat. If Harry in the above example were to repeat this strategy successfully every six months, he would reap thousands of extra dollars per year in premiums on the stock he owns, even if it declines in value. Covered call writers also retain voting and dividend rights on their underlying stock.

Limitations of Covered Call Writing

In addition to having to deliver your stock at a price below the current market price, getting called out on a stock generates a reportable transaction. This can be a major issue to consider for an investor who writes calls on several hundred or even a thousand shares of stock. Most financial advisors will tell their clients that, while this strategy can be a very sensible way to increase their investment returns over time, it should probably be done by investment professionals, and only experienced investors who have had some education and training in the mechanics of options should try to do it themselves. There are other issues to consider as well, such as commissions, margin interest and other transaction fees that may apply. Covered call writers are also limited to writing calls on stocks that offer options, and, of course, they must already own at least a round lot of any stock upon which they choose to write a call. Therefore, this strategy is not available for bond or mutual fund investors.