Covered Call Horror Stories

By Richard N. Croft

In the late 1990s I sold a covered call on, let’s call the security, XYZ. A “nom de plume” to protect the guilty… or innocent, depending on your point of view.

In any event, XYZ was a particularly volatile technology company trading at $21.75 per share in January 1998. I bought the shares for myself and clients and immediately sold January (1999) 22.50 calls at $4.75 per share. Looked pretty good when I entered the trade. The one year return assuming XYZ was called away, came in at 32.3%.

A much better return than the TSX composite index with significantly less risk as it turned out. To be fair, I need to qualify what I mean by less risk. Investors do not view risk in terms of volatility but rather focus on downside risk which equates to the likelihood of losing part or all of one’s initial investment. At least initially!

Read More at OptionMatters.ca a Montreal Exchange initiative