Considered the most conservative of all option plays, this strategy - which basically involves selling (or "writing") one call option for each 100 shares of a stock you own - can be employed for one or more of five distinct purposes:
- To generate a stream of additional income - over and above dividend payments - from individual stocks in your equity portfolio.
- To generate a stream of income from stocks you own that pay no dividends.
- To reduce the effective cost basis of longer-term stock holdings by bringing in option premiums, thus recovering some of the original purchase price.
- To provide a limited hedge against potential losses in portfolio value as a result of overall market pullbacks or cyclical downturns in the prices of specific stocks.
- As an income-producing substitute for a "limit-sell order" - intended to liquidate a stock position when a specific profit target is achieved.