CHART NAVIGATOR
with them, and typically their dealing charges are more than a cheap broker, especially an online broker. And whereas in the past that stock was considered collateral, now the broker in fact loans you the money to cover the position, even though you hold the stock, to satisfy the market of your ability to deliver. It all sounds a bit strange to me. Surely the stock is the best collateral for, well, the stock. But the mechanics will not really impact on your trade, excepting that you are required to keep some cash on account to cover small costs related to this set up.
“AS PRIVATE INVESTORS THERE IS NO REASON WHY WE SHOULDN’T DO COVERED WRITING.”
out, provided you can find someone who will sell back to you. I've shown a chart here of Taylor Wimpey plc (LON:TW.). It's just the kind of share that could have been very good for covered call writing since 2009. Basically when you have a trending stock then you can fairly well predict what strike price is unlikely to get hit, or hit a little which means it probably won't get exercised. If you were worried about a big price fall, remembering that you'll not be at liberty to sell because you have to cover your call until expiry, then you could protect the capital in the stock by buying a PUT option out of the money (in other words well below the current traded price). This will be cheap as the likelihood of it being hit is low. Of course it's a cost
and would possibly more than wipe out the premium you received that quarter but then you could protect the capital tied up in the stock position. You also wouldn't have to wait until the expiry to sell the Put if it did perform. If it's increasing in value at the time then it should be easy enough to find a buyer. In fact, thinking about it, a strategy that would work is to use the premium to do just that – pay for your PUT option to protect your capital each quarter. Basically, free insurance of your capital against the market going down to whatever level you determine is worth protecting. It's an idea. Now the warm weather is here I have a trade suggestion: short trousers, long bananas.
It's a neat way to take advantage of a stock holding that is unlikely to impress but is likely to plod along. The premium, which is paid to you straight away at the beginning of the contract, is likely to make your returns look much better. You can write up to four times per year as they expire quarterly. And with interest rates at historic lows, it's a good way to take advantage of the lacklustre UK market. I used to do covered call writing in the past. It's pretty low maintenance, and if you get it right you can just keep getting paid without being exercised. You are of course at liberty to offer to buy the contract back at any time before the expiry date, and effectively close
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