Covered Call writing (when investors sell call options against stock they own) has been among the most popular basic Option Investing strategies. If managed correctly, it can help investors increase returns & provide extra income while offering downside Protection. This is a solid strategy for nuetral to bullish stock outlooks, but also does supply some level of downside protection on declining stocks and in bearish market environments. A few things to consider when Writing Covered Calls:

1) If it looks to good to be true, it probably is. If the potential return on Investment for a particular Covered Call is very high or much greater than Option Premiums relative to a peer group, be aware of the risk. The stock may ready to swing in either direction dramatically and could drop well below the level of protection that the sold call provides. Just because the potential returns are high doesn't make them good investments. Example: we have seen numerous Bio-Tech stock premiums get inflated when they are waiting from some kind of FDA Approval. Many of which ended up not getting approval and the stocks dramatically sold off. On the other hand, some always do get approval and can have substantial gains in a one day period.

2) It is important to pick quality stocks in any Covered Call Portfolio. Similar to the 1st point, don't always be lured by the Option Premiums themselves. Rather, investigate the companies and be comfortable with them as an investment first. That is not to say that you cannot write covered calls on more risky plays. It just means that you might consider having a mix of dull and boring high quality stocks and some more aggressive/higher risk stocks. Every investor should be aware of his or her risk tolerance and should find the appropriate balance that is best for themselves.

3) Diversify, diversify, diversify: Here is another cliche, but just like any other portfolio of stocks, bonds, mutual funds, etc. it is important to diversify any covered call investments. Expanding on point # 2, it is important to not only diversify the types of stocks, but also to distribute your capital evenly across your covered call investments. Meaning, if you have 100,000 for a covered call portfolio, you may not want to exceed 10% on each position individually. Of course, again, everyone's risk tolerance is different but one should stay away from putting all their money in one type of position.

4) Slow and Steady wins the race: Covered Calls is not a "get rich quick" strategy. It should be used to slowly and steadily gain income and build wealth. Chipping away at smaller returns that have both downside protection and strong fundamentals behind them is a way to be more successful in the long term. Trying to "score" on big trades with potentially large returns with more risk can be lead to portfolio losses. One great example is a story of a man who consistantly wrote calls for small gains and was making around 3% a month. Annualized out, that is close to 36% a year. He decided, however, to take shot on a highly volatile stock that offered the potential of 20% return in a month. What ended up happening is that the stock failed to attain FDA Approval during that time and went down 50% in day. So instead of having a great year, this investor's greed got the best of him and he ended up with negative returns for that year. This was a tough lesson to be learned!

5) Being "Called Away" is a good thing. When an option writer is "exercised" they should be happy that their profit is made and not worry that the stock could have made more money. Covered Call Sellers should also be content to see their stocks moving up.This means there is a strong probability that their stocks will be called away and they will realizing their predetermined profits.If your stock is called away, be content and move on to a new Covered Call position. Remember your original goal to lock in a certain amount of profit while having a level of downside protection. Do not second guess your orginal plan.

There are some important things to consider if your stock is going to be called away (and is well above the strike). 1) You may have a possibility that you wrote a longer term call and its nearing a "long term capital gain." In this case, you may want to buy back the option at a loss and re-write a later expiration. (Example, you own a stock for 10-11 months and that gain is going to now be a short term tax gain if it is excersised, so you roll it out for more time). 2) The stock you own is performing consistantly well and maintains strong fundamentals such as increasing earnings growth and strong analyst support. Example: you wrote a 35 call and the stock is now $36.00 at the end of expiration. If you are comfortable with the stock and confident that this is still a good investment, then you might buy back the call and re-write another call out further in time (this is referred to as a rollover). This may also save you extra commission charges as brokers excercise charges are often higher than a self made online trade. Also, you would be making 2 trades here instead of 3 (exercise assigment, re-buy stock, sell new option). However, its is important to remember that Investors should not always dwell on always trying to save commission or make a trade based on a tax situation because it may take away from your original focus and goals. But it important to keep these scenarios in mind to help maximize your returns.