| Covered Calls | | | | which will reduce the basis in the equity position by the |
| Options are most commonly used by investors for | | | | premium received. In other words, he has hedged his |
| either leverage and / or insurance (hedging). As | | | | position against any short term fluctuations his equity |
| leverage, options allow the investor to control an equity | | | | position may experience. |
| position without paying 100% of the share price. For | | | | Writing covered call options provide many benefits |
| example, rather than going on the open market and | | | | with the major reason being collecting premium from |
| purchasing 100 shares of IBM for $8,257 ($82.57 per | | | | the sale of such an option. The premium collected |
| share), an investor could control the same amount of | | | | goes into your account and can then be used to invest |
| shares at a given strike price for a fraction of the cost | | | | in other positions. The writer keeps the premium |
| such as the Jan 07 $80 strike with a total cost of | | | | regardless of whether or not the option is exercised. |
| $1,050. As insurance / hedge, options can assist in | | | | Another important aspect with selling options is that of |
| protecting against price fluctuations. For example, the | | | | time value which now works for you rather than |
| same IBM investor can sell a call against his shares | | | | against you. |