Have your clients asked about the performance of covered writing? Writing covered calls, also known as the "Buy-Write Strategy," is a basic options strategy, and it is a favorite among income-oriented investors. This article will first explain how covered writing with index calls works, and then it will present an overview of the BXM Index, the CBOE BuyWrite Monthly Index. Traditionally, the "Buy-Write Strategy" consists of selling, or writing, call options on a share-for-share basis against purchased or owned stocks. A variation on traditional covered writing is to sell index calls against a group of owned stocks, the performance of which closely matches the index.
In the following example of an S& P 500 Buy-Write Strategy, assume that your client owns a portfolio of stocks that closely follows S& P 500 Stock Index. Also assume that the value of the portfolio is $85,000, the S& P 500 Index is 850 and it is 30 days prior to September expiration. If your client has a neutral forecast for the S& P 500 Stock Index over the next 60 days and would like some additional income, then selling a 30-day 850 SPX Index call at 40, or $4,000, might be appropriate. Table 1 and Figure 1 show the profit/loss results of this strategy at expiration. Taxes, commissions and other transaction costs have been omitted for the sake of simplicity.
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Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available from your broker or The Options Clearing Corporation, 400 S. LaSalle Street, Chicago, IL 60605. CBOE and Chicago Board Options Exchange are registered trademarks of the Chicago Board Options Exchange, Incorporated. 2003 Chicago Board Options Exchange, Incorporated, All Rights Reserved.
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Have your clients asked about the performance of covered writing? Writing covered calls, also known as the "Buy-Write Strategy," is a basic options strategy, and it is a favorite among income-oriented investors. This article will first explain how covered writing with index calls works, and then it will present an overview of the BXM Index, the CBOE BuyWrite Monthly Index. Traditionally, the "Buy-Write
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