Pawan,

Thanks for your comments. You bring up a very important point (the downside risk inherent in the covered call position). This is a very real risk, but it is a risk that is also present in just owning stocks. I wrote the article from the perspective of examining your equity holdings from last year, many of which were unchanged, and suggesting that covered call writing might be something to consider if you would like to add returns during years when stock prices were flat. I highlighted the risks and rewards from the perspective of owning the stock by itself, with unlimited upside, to owning the covered call position with limited upside and a bit of possible return from the option premium sold.

Although the covered call position will outperform a stock-only position in a downward price move, it does have almost as much risk on the downside so that is why I did not highlight that aspect. If you compared the covered call to say a fixed income investment, the additional downside risk of the covered call would be something that you would need to address.

Thanks again for the great comment, and hope this explanation clears things up. If not, please post another comment and I will gladly respond…

Bud Haslett, CFA