I anticipate another broad market correction during the next six months. Because of this, I'm currently writing covered calls against several long positions in my portfolio. These calls are written against stocks for which I do not anticipate a significant price increase in the next six months or a year, and which I do not wish to sell because I like their long-term prospects.
I'm choosing calls with expiration dates in August, September, and October.
Writing covered calls will increase my cash position (currently 36% of my portfolio) so I can buy more stock during the downturn. In addition, the premium paid on calls at a given strike price is linked to the current share price. Consider;
Example A: The stock is selling for $34, and the option's strike price is $35,
or,
Example B: The stock is selling for $30, and the option's strike price is $35.
Writing a call is a promise to sell my stock at that strike price on or by the expiration date. I can expect to be paid more for that promise when the share price is only slightly below the strike price.
Since I anticipate share prices will decrease in the short term for each of these stocks, I'm writing the calls now to take advantage of the current, higher share price.
There are other stocks in my portfolio upon which I could profitably write calls, but have chosen not to do so. In each case, there is a special situation with the stock which makes using options undesirable. In one case, the company (AGU) is in the middle of widely publicized take-over negotiations. In another case (UMH) the company is too small to have open options interest. A third (HP; that's Helmerich-Payne, not Hewlett-Packard) is such a valued part of my portfolio that I won't risk it being called away.
