New Insights Covered Call Writ

by Lawrence G. McMillan and Richard Lehman

Book Overview

Does this sound like you? You want the long-term returns from stocks but don't like the volatility. You like the security of income from bonds and CDs, but the yields are too low. You wish there was a sensible discipline you could follow that would provide the attractive returns offered by common stock yet with more consistency and less risk.

If so, then covered call writing may be the investment strategy you've been looking for.

You can...

• Format: Hardcover
• Language: English
• ISBN: 1576601331
• ISBN13: 9781576601334
• Release Date: May 2003
• Publisher: Bloomberg Press
• Length: 252 Pages
• Weight: 1.26 lbs.
• Dimensions: 1.0" x 6.3" x 9.2"

Customer Reviews

New Insights on Covered Call Writing

Messrs. Lehman and McMillan are excellent writers. The reason for choosing this book was my previous knowledge of Larry McMillan and his reputation in options as a teacher and trader. Moreover, my interest in purchasing this book was not so much as to "how" to write covered calls, but "when" and "why" to close out the position, and what the best strategy for writing OTM, ATM or ITM covered calls. I was pleasantly surprised as to everything covered in this book. I learned so much and I certainly had all of my questions answered. Since, one must be very careful when trading options, covered calls are the safest way for the novice trader (in my opinion) to put money in your pocket each month, and this book was extremely helpful not only in the selection of the best stocks but also the execution.

Probably the Best Available on the Subject to Date.

I liked this book and would recommend it to those interested in covered call writing. There are a few things to keep in mind while reading this book: 1- McMillan is a very well established authority on option strategies, I remember reading his options books way back in 1984, when I was the local options specialist at Dean Witter. However, if you read his comments on covered call writing in his other books, he's much more guarded with his support than he is in this text. 2- Nowhere in the book do the authors discuss the extreme increase in time and especially paperwork that is required to successfully implement this strategy. I've always thought of managing an equity portfolio as investing (mostly passive), managing covered call positions is more like work (trading takes lots of time and effort to do it right). That's OK, call writing also reduces risk and gives you a lot more control, but be prepared to invest a lot of your time. 3- In my experience, most people really have a hard time with this strategy. Yes, it's easy to implement, but most dedicated options traders find this a bit too basic for their interests, and it ties up too much capital. Most equity investors have a hard time with the amount of work, loss of long-term capital gains impacts, tax reporting headaches and giving up some appreciation potential. 4- The 20 stock study described in the book is very misleading. For some reason the positions with 163 months of data show covered writing (CW) underperforming a buy-and-hold (B & H) strategy by about 700 basis points. I don't know if this is due to a flaw in the data or something to do with option premiums in the early years of the study. Data from comparing CW returns to BH returns for periods less than 163 months show identical returns between the two strategies. This is consistent with results from more rigorous academic studies, which generally show underperformance of covered writing of 30 to 50 basis points. This is also consistent with my own experience. This makes sense, since covered writing is slightly to moderately less risky than buy-and-hold investing, the returns should be similar or slightly lower. 5- I was amused at the author's description of how he traded a client account. Frankly, trading in the way described is not a viable approach to investing. Covered call and cash backed put writing is best used to hedge and to reduce the volatility of returns. That's a whole different ballgame from the way the author traded the account in the book. The people who usually succeed with covered call writing tend to be really good percentage thinkers, very organized at tracking and analyzing investment results, and good with the basic record keeping. Those who thrive at it really love it, but it's not for everyone. I wish the book would have addressed these issues. Also, there is a lot more strategy involved in managing a covered write portfolio than was discussed in this book. To my mind, the subject was over-

Know enough to teach your broker a thing or two.

In my view, you will not find a better education on options or covered call writing anywhere. I wish other investing books were written this thoroughly. After reading this, I see now that other sources greatly oversimplified covered writing and frequently promised unrealistic returns. This book gives you all the ins and outs so you can judge for yourself what is possible, based on how you implement it. It is not beyond the capabilities of most people -- it just takes a little time to learn it and determine how best to make it work for you. I had no idea it was so flexible. The strategy makes great sense for me, yet my stock broker never even suggested it. Instead, he kept insisting I just hold on to the stocks he recommended as they kept declining. Maybe now I should teach HIM a thing or two!

Valuable info and a great read...

This book was by far the most comprehensive on the subject of covered call writing. After reading, I gained a tremendous amount of insight on covered call writing even though I'd tried it before. I now have a better appreciation for the tremendous capabilities of the strategy. I'm not a rocket scientist and even though it seemed this book was designed for the pros, I was able to understand it. In my opinion, money well spent.

A Compelling Strategy for a Low-Return World

I found this book is especially timely and useful. We are coming out of an environment where few cared about risk or did any research, and many got burned badly by the ensuing collapse of the tech/growth bubble. The book is carefully researched and lays out compelling support for the strategies it advocates. While some may accept these types of strategies on faith, I prefer the thorough detail and back-up that this book provides and think investors are more likley to gain the confidence needed to actually employ and stick with the strategies when they genuinely understand them. The people who don't want to do any work are the kind of people who got burned most badly in the bubble. That said, as options go the strategies in this book are fairly basic conceptually and not difficult for the lay reader to readily grasp and employ. They are not exotic (the fact is that options can be used for almost any purpose). As for the value of these types of strategies, in our new low-return, high volatility world, I think it is reasonable to expect that the ability to boost returns modestly while lowering risk will make its readers wealthier and sleep a little better. Nothing is a free lunch, though. If the market were to take off, these strategies would lag (but at current valuation levels this seems unlikely). Another cost, aside from the nominal price of the book, is that it putting these strategies to work will take some effort and some commitment. And you won't have much to talk about at cocktail parties. But no one has those anymore anyway--that was the roaring 90s.