As a put buyer, you have one of three possible outcomes:1. The put is sold. You can sell the put at any time prior to expiration. For example, if the underlying stock’s market value fallsbelow the strike price, the value of your long put increases, andthe put can be sold at a profit. Because time value declines overthe holding period, it is a highly speculative strategy to buyputs purely for short-term profits. It is unlikely that you canearn profits by consistently buying long puts without someother reasoning behind that decision. For example, if youbelieve that stocks in your portfolio are overbought and youwant to protect paper profits, long puts can be used as a formof insurance to protect your stock positions.2. The put expires worthless. If you take no action before expiration date, the long put becomes worthless, and the entire premium you paid would be a loss. When you buy puts, you profitonly if and when the market value of the underlying stockdeclines; if the value remains at or above the strike price, yourput does not appreciate. Even if the stock does fall a few points,the put loses time value as expiration approaches; so in order toprofit, you need the stock to decline enough points to offsetyour original cost and to replace time value with intrinsic value,all before expiration date.3. You exercise the put. If the stock’s current market value is farlower than the put’s strike price, you have the right to sell 100shares at the higher strike price. If you own shares of stock and
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you bought the put for downside protection, exercise can workas a sensible exit strategy. For example, you may have purchasedshares originally when the stock looked like a viable long-termhold, but the financial picture has since changed. If you ownone put per 100 shares, exercising the put and selling sharesenables you to keep paper profits while escaping from the longposition in stock.
The Overlooked Value of PutsThe put’s strategic potential is easily overlooked by investors and speculators. More attention is paid to calls. There are good reasons for this.Short calls can be covered by ownership of 100 shares of stock per call,but puts cannot be covered in the same way. The put is more exotic andalien to the mindset of many investors. Most people are used to bettingon the potential for stocks to rise in value, but are not as willing to consider the possibility of price declines. This is ironic considering theunavoidable cyclical nature of investing. Prices rise, but they also fall, sousing puts as well as calls to speculate on price movement or to protectpaper profits presents a number of interesting strategic possibilities.Where do puts fit for the conservative investor? Several possible applications of puts are worth considering on both the long and short sides.The best known is the use of long puts for insurance. If you buy one putfor every 100 shares of stock, you protect your paper profits; in theevent of a decline in the stock’s market value, the put’s premium valueincreases. So, once the stock’s price goes below the put’s strike price, lossof stock value is replaced dollar for dollar in higher put premium value.This protection of paper profits—a form of insurance—is a conservative strategy. You pay a premium for the put because you fear that stockprices have risen too quickly, but you do not want to take profits in thestock. You can use puts in this situation to keep the stock while protecting profits and, perhaps, even taking them without needing to sellstock. This insurance does not have to be expensive. Just as you canselect insurance based on varying levels of deductible and copaymentdollar values, you can select puts based on their cost and level of protection. For example, if you want to protect all of your paper profits,
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you buy puts with strike prices close to current market value; thatmeans you pay a premium with a high level of time value. If you arewilling to carry some of the risk, you could buy puts at lower strikeprices; these would be far cheaper but would provide less protection.For example, if you originally purchased 100 shares of stock at $42 pershare, and today’s market price is $52, you have 10 points of paper profits. If you buy a 50 put, you protect eight of those 10 points, but the putis expensive. If you buy a 45 put, you cover only 3 points of paper profits, but the put is far cheaper.
The Insurance Cost of PutsThe put has a limited life, so your protection extends only to expirationdate. Using puts for insurance therefore requires periodic replacementof the put. Again, this compares to insurance like health, homeowners,or life policies, where periodic premium payments are required. As withall insurance, the value of paying a premium depends on the premiumcost and the protection it provides.Buying puts can provide benefits beyond mere speculation. Sellingputs—going short—presents an entirely different risk profile than thelong strategy, but it is not necessarily high risk. Shorting puts may, infact, be a viable strategy in your conservative portfolio.A short call can be covered simply by owning 100 shares of stock. Thatrelationship eliminates the market risk and coverts a high-risk strategyto a very conservative strategy. But puts cannot be covered in the samemanner. There is an important difference, however. While an uncovered call presents tremendous risks, the uncovered short put has only alimited risk. The stock can only fall to zero value in the very worst case,so the potential risk is finite. On a practical level, a stock’s likely marketvalue has a floor somewhere higher than zero, and this level is subjective. You may define the price floor as technical support level, bookvalue per share, or based on recent trading patterns. The point is thatthe real risk is the difference in points between the put’s strike price andthe lowest likely trading price per share. Most people consider the technical support level to be that price.
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If we accept that a specific price-support level is also a lowest likelytrading price, we can also accept the risk of going short with puts. Thatrisk is further discounted by the value of the put premium you will bepaid when you short the put. When you also consider that time value isinvolved, that net risk can be quite minor. Remember, buying puts is along shot for the speculator due to time value premium. But for theseller, time value is a benefit; the farther the time value falls, the higheryour profit in shorting the put. You may review recent trading ranges ofthe stock to judge the safety or risk of selling puts.
Conservative Guidelines: Selling PutsIs selling puts a conservative strategy? It can be in some circumstances.We have to assume several elements to conclude that short puts areappropriate in the conservative portfolio:1. The strike price is a fair price for the stock. Whenever you short aput, you have to accept the possibility that the put will be exercised. You have to accept the strike price as a price you are willing to pay for the stock.2. The premium you receive justifies the exposure. When you selloptions, you are paid the premium. That premium and thelength of time you remain exposed to possible exercise have tojustify the decision.3. The risk range is minimal. When you consider the spreadbetween the put’s strike price and your estimated support pricefor the stock, minus the put premium, how many pointsremain? This is the most reliable method for judging whetheror not to sell puts.4. Ultimately, you would like to acquire shares of the stock.Whenever you sell puts, you should also be willing to acquireshares. If you really don’t want to own the stock, then youshould not sell puts. As a conservative standard, you should bewilling to acquire shares of that specific stock at the put’s strikeprice.
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Example: You have been watching a company for several months, andyou like the fundamentals. The stock is currently valued at $62 pershare. You decide that if the stock’s value declines to $55, you will buy100 shares. As an alternative, you also consider selling puts. You analyzethe values and conclude that it would be a smart move. The lowest likely trading price, in your opinion, is about $46, 9 points lower than yourtarget acquisition price of $55 per share. The 55 put is currently valuedat 6 ($600).Here is the risk profile of these price relationships:Strike price of the put
$55
Support level estimate
$46
Gross risk margin
$9
Minus: put premium
$6
Net risk per share
$3
Should you sell the 55 put? If the stock’s value were to fall below $55 pershare, the put would be exercised. Your risk exposure is really at the$49-per-share level (strike price of $55 minus 6 points of premium).The entire premium consists of time value, and your net risk is 3points. The longer the short put remains open, the more the time valuedeteriorates. Given the minimal risk, this is a sensible strategy in a conservative portfolio. Were the margins higher, the risk of acquiring stockat potentially inflated values would not make sense.
Puts as a Form of Contingent PurchaseShort puts can be thought of as a form of contingent purchase. Whenyou compare the risk of selling puts to the risk of buying shares outright, it makes sense. Consider the alternative given in the previousexample. If you bought shares today, your cost would be $62 per share.If the stock’s market value falls, you lose one dollar per share for eachpoint of loss. If the stock falls to $49 per share, your long stock loss is$1,700. Compared to the alternative, selling a put, the risk of buying100 shares is far greater. In this situation, you are better off selling the
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55 put. Your net cost, after considering the premium you receive forselling the put, would be $49 per share, equal to the market value atthat time.This type of analysis—reviewing one decision against another—demonstrates how realistic comparisons can help to define your risklevels. If we begin with the assumption that selling puts short is highrisk, we can never get beyond that conclusion. It is true that in somecircumstances, shorting puts is extremely high risk. For example, if youshort puts on stock you do not want to own, that contradicts your conservative standards. The analysis of any option-based strategy shouldinclude a preliminary thorough analysis of the underlying stock and itsfundamental strength or weakness as well as a study of its price volatility. If you shop for the richest option premium levels, you end up shorting puts on the highest-risk stocks, which you do not want to do. Theprevious example demonstrates, however, that in the right circumstances, using puts as a form of contingent purchase is a wise decision.
Listed Options and LEAPS OptionsTraditionally, risk assessment for options is based on a very short lifespan, 8 months or less for listed options. The ever-growing popularity ofLEAPS—long-term options that last as long as 36 months—changesthe analysis. Even for the long position, the risk of ever-declining timevalue takes on a different context when looking 2 or 3 years ahead.The availability of long-term options makes long positions more viablein many more situations. Longer term options contain far greater timevalue, of course, because time value is just that: the value of time. So,compared with a 6- or 8-month time span, a 24- to 36-month optionhas far greater potential—for both long and short positions.For example, it is practical to use LEAPS to leverage capital whileretaining the choice of buying shares in the future and, at the sametime, reducing the cost of buying options. Chapter 6, “Alternatives toStock Purchase,” explains how contingent purchase strategies work. Fornow, we present only an overview of this powerful strategic approach tothe market.
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Using Long Calls in Volatile MarketsLet’s assume that you have your eyes on several different stocks, andyou believe that all offer potential for growth over time. The problem isthat the market has been very volatile lately, and you’re not surewhether the timing is good for picking up shares. This not-uncommonsituation makes it difficult even for conservative investors to time theirdecisions. The fundamentals work, and long-term prospects are strong;even so, you are not sure about the short-term prospects for a stock.Influencing your decision, annual cyclical change, outside economicforces, and market or sector trends are all affecting the timing of yourdecision. In this environment, it could make sense to buy LEAPS callsinstead of stock. As an initial risk analysis, you cannot lose more thanthe premium cost of the LEAPS call, so the initial market risk is lower.At the same time, in going long with calls, you would acquire the right(but not the obligation) to buy 100 shares of the underlying stock atany time before expiration. If the LEAPS call has 30 months to go, a lotcan happen between now and then.The risk is that the stock’s market value will not rise, or even if it does,it may not rise enough to offset the cost of time value and to also appreciate adequately to justify your investment. There is a solution. You canreduce the cost of buying the LEAPS call by selling calls on the samestock. As long as those short calls expire before the long call, and as longas the short call’s strike prices are higher than the strike price of thelong call, there is no market risk. For example, you buy a 50 call expiring in 30 months, and then sell a 55 call expiring in 21 months. If thestock’s market value rises and the short 55 call is exercised, you can satisfy the exercise with your long call, making $500 on the transaction(selling at 55, buying at 50). Or, if the short call expires, it can bereplaced with another. A likely scenario in this “covered option” position is that the short call’s time value will decline; it can be closed at aprofit and replaced with another call. As long as you remember therule—higher strike prices, earlier expiration—and the number of shortpositions does not exceed the number of long positions open at thesame time, you can write as many covered short positions as you like. Itis even possible, based on ideal price movement of the underlyingstock, that your premium income from selling short calls can repay the
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OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
entire cost of the long-term long LEAPS position. There are no guarantees, but it is possible.The basic long-short LEAPS strategy is summarized in Figure 2–2.
Sell 55 call,21-monthexpiration
Buy 50 call,30-monthexpiration
Figure 2–2 Long- and short-call strategy.
In the figure, you see that this strategy has two legs. First, you purchasea long call with a 50 strike price, and later, you sell a 55 call. In order toavoid an uncovered short position, the 55 call must expire at the sametime as the long call, or before. If the short call outlasts the long call,you face a period in which that short call is uncovered.This example shows that the ideal price movement in the underlyingstock involves a minimum number of points. You want to acquire valuein the long position so that you can exercise the long call later; at thesame time, you do not want to see the short position rising in valuebecause you want it to expire worthless (or you want to be able to closeit out at a profit in the future). Remember, the goal in this strategy istwofold. First, you want to have the ability to exercise the long call andbuy 100 shares of stock at the strike price. Second, you want to reducethe cost of the long position with a “covered” short position at a higherstrike price. We put quotation marks on the word covered because thisChapter 2 Option Basics
29
strategy is not the same as covering a short call with 100 shares of stock.The coverage refers to offsetting positions, one long and the othershort. If the short position is exercised, you can use the long position tofulfill the obligation. This enables you to mitigate risk in terms of bothcost and potential exercise.The “contingent purchase” with “covered option” strategy is not complex, and it may be a smart fit for conservative portfolios. This questionis explored in depth in Chapter 6. The point is that LEAPS optionsexpand the strategic possibilities while also making it possible to reducemany forms of risk.
Using LEAPS Puts in a Covered CapacityLong LEAPS puts can work in the same way. For example, you maypurchase LEAPS puts for insurance on existing long stock positions;and reduce your insurance cost by selling puts that expire sooner thanthe long put; and that have lower strike prices. This basic strategy—combining long puts and covering them with short puts—is summarized in Figure 2–3.
Buy 60 put,30-monthexpiration
Sell 55 put,21-monthexpiration
Figure 2–3 Long- and short-put strategy.
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OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
This figure is the reverse of the contingent purchase previously shown.The difference is that puts are used instead of calls. This strategyassumes that the underlying stock’s value is trending downward ortrading in a narrow price range. The purpose in covering the put is toreduce risk of exercise and resulting loss, and at the same time, toreduce the cost of buying the long put. This strategy has a very limitedrisk. If the stock’s price rises above original strike price, the loss is limited to the net cost between the long and short put positions; and if thestock’s price falls below the short put’s strike price, exercise can be offset by the long put. (This means that instead of being required to buy100 shares of stock, you would simply exercise your long put, so thatyou would pick up 5 points of profit, the difference between the long 60put and the short 55 put.)These strategies—covering long options with shorter term short positions—work best when your estimate of likely price movement in thestock is correct. This, of course, is true for any market strategy youemploy. The call strategy works best when the market price of theunderlying stock rises over time, and the put strategy is preferable whenthe price declines. The wisdom of using the strategy is based on yourability to read intermediate-term volatility trends accurately. Thestrategies make long positions in options more practical than the purely speculative approach, but profitability is not ensured. The overallpurpose of the long option strategy is to maximize the opportunitywhile identifying worst-case outcomes and setting up the strategies sothat you will not lose or so that losses are minimal. In the case of calls,you may want to exercise the call to acquire stock far below marketvalue; in the case of puts, you can insure existing long stock positionswhile mitigating the cost of carrying that insurance.
Coordinating Strategies with Portfolio GoalsYour ultimate purpose in using options should be to augment or protectyour conservative goals. If your goals are best served by simply buyingstock and not using options for any purpose, then that is the policy thatshould overrule all other possibilities. However, some option strategies arecompelling enough that they cannot be rejected without further study.
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The conservative strategies worth considering must be coordinatedwith a broader overall strategy. The following basic conservative optionstrategies are explained in greater detail in chapters 4, 5, and 6:1. Using long puts to insure long stock positions. Your conservativeposition in stocks, held for the long term, should not be affected by short-term price uncertainties. If we accept the preceptsof both the Dow theory and the random-walk hypothesis, werealize that short-term price movement is not reliable as anindicator of longer term trends. As a conservative investor, youhave probably based your portfolio decisions on fundamentalindicators, and you monitor financial reports as they arereleased to spot emerging and changing trends. In theory, youcan simply ignore short-term price movement without concernfor temporary market volatility. In practice, marketwide pricegyrations are unsettling; they raise questions even among conservative investors. (See Chapter 4.)The strategically timed purchase of puts can work as a timingmechanism at what you consider to be market tops. You wantto continue holding stock as a long-term investment, so you arenot inclined to take profits; but you are also concerned aboutlosing paper profits in the short term, even though that concernis contradicted by your long-term investment goals. Buyingputs makes sense for two reasons. First, if you are correct andthe stock is overpriced at the moment, the long put will beprofitable and those profits will offset the unavoidable pricecorrection. Second, the fundamental indicators for the stockmay change at the same time that the price gyration is occurring; in fact, the unexpected volatility may foreshadow weakness in the fundamentals. The change could also affect youropinion of the stock as a safe long-term investment, in whichcase you may want to dispose of shares. If the stock’s marketvalue is depressed by the time you decide to dispose of shares,you will have to sell at a loss off the high. However, if youbought puts for insurance at or near the price peak, you nowhave a choice. You can sell the put and realize a short-termprofit while holding onto shares, or you can exercise the putand dispose of stock at the higher exercise price. In this man-
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OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
ner, you achieve two goals. First, you preserve your paper profits by selling at or near the price peak (the fixed put strikeprice). Second, you accomplish disposal of shares when youropinion of the company has changed.In this example, the use of puts for insurance was perfectly inline with your conservative goals. We can never assume thatconservative means we pick a portfolio and stay with it, nomatter how the fundamentals change. On the contrary, you areprobably continually monitoring financial strength, and youmake changes in your portfolio to ensure that your fundamental standards are matched in the mix of your portfolio. Changesin price may precede a change in financial strength or operatingresults, so price changes may be reliable indicators for usingputs to insure paper profits.2. Covered call writing against long stock positions. The best-knownconservative options strategy is the traditional covered call. Inthis strategy, you write one call for every 100 shares owned. It isappropriate when the call, if exercised, would produce a capitalgain in the stock that you would be happy to realize. In otherwords, if you are not willing to have stock exercised, then youshould not write the covered call. Assuming that you wouldaccept exercise as one possible outcome, you can use techniquessuch as rolling out of one call and into another to maximizeincome. The properly selected covered call strategy producesconsistent current income. In exchange for writing coveredcalls, you risk losing out on increased market value; when stockprices rise above strike price and calls are exercised, your sharescan be called away. However, when you compare that risk to theregular and dependable creation of current income in a conservative market risk profile, it is apparent that covered call writing will beat market averages without increasing market risks.Covered call writing also discounts your basis in stock, so yourprofit cushion is further protected. (See Chapter 5.)The traditional covered call strategy makes sense and fits wellwith your conservative risk profile when all of the required elements are present: You would accept exercise if it occurs; exer-
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cise would produce a good return on your investment; andoverall, the strategy will produce short-term profits whileenabling you to retain your long-term portfolio. In thoseinstances where stock is called away, you can replace it with adifferent stock or use long calls for contingent purchase planning (see 3, below).3. Options for contingent purchase plans. Of the three basic conservative option strategies, contingent purchase plans are the mostcomplex. The various methods you can employ are goodmatches in a conservative portfolio as long as the overall standards are maintained and given priority. One common trap foroptions traders is to become intrigued with the potential profitability of a particular strategy and to lose sight of the moreimportant portfolio goals. Contingent purchase is conservativebecause it provides alternatives to buying stock at a fixed priceor, when price trends do not continue, to limiting losses withthe use of long options. Those losses are limited in two ways.First, you can never lose more than the long premium you pay.Second, when employing LEAPS options, you can cover thelong-call position with short sales as long as the short callsexpire earlier and are high-strike price contracts. Contingentpurchase is equally interesting when using short puts in placeof long calls, and the most advanced strategy involves sellingcovered calls and uncovered puts at the same time. In Chapter6, a detailed example of this more complex strategy demonstrates why this is a conservative strategy and how it consistently produces extra current income in your portfolio. (SeeChapter 6.)
Option and Stock Volatility:The Central Element of RiskThe whole question of risk is central to the options decision and tomaintaining the conservative structure and theme in your portfolio.The selection of options can be directly related to price volatility as onemeasurement of risk, perhaps the most important.
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OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
When you pick stocks, you decide whether to follow fundamental ortechnical indicators, or a combination of both. Conservative investorstend to lean toward the fundamentals, so you probably prefer financialstatements to charts and price trends. However, with options, you facea different criterion for judging safety. Because options have no tangible value of their own, there are no fundamentals specifically related tooptions. The stock fundamentals are crucial for picking stocks, especially if you plan to write covered calls. However, for options, you needto compare volatility to determine safety and risk levels.An option’s premium level is one of many technical indicators for thevolatility levels of stocks. The more volatile the stock’s price, the greaterthe risk to buying the stock; and the more risk in the stock, the greaterthe profit potential (and risk) in the option. Several features contributeto volatility in options, including time until expiration, proximity ofstock market price to strike price, and to some extent, the volatility ofthe market as a whole (as measured by index movements).
Critical Analysis of VolatilityAs a conservative standard, you must balance the volatility of the stockand option (as a measurement of risk levels) against premium incomepotential in the option (as a measurement of opportunity for profits).The two sides of the question—risk and opportunity—are related, ofcourse, and cannot be reviewed separately. Options traders often aremistakenly attracted to higher premium options for covered call writing. Beginning with the standard of investing conservatively, it is a mistake to seek high-premium options to sell, and then buy stock primarilyto cover calls. This approach programs in high-risk portfolio selection.It would be simple if option valuation could be fixed by formula.Logically, it would seem that premium levels should be fixed by the various factors involved. Time value should decline at a predictable rate asexpiration nears; intrinsic value is, by definition, also predictable basedon movement in the stock’s price; and proximity of current stock valueto strike price of the option should affect valuation in a predictablemanner. But these theoretical price standards for options are only starting points. Options do often sell at or near their calculated value levels,
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but the real buying and selling opportunities in options can be found aswell. The variation occurs because the market is chaotic. Optionstraders, like all investors, affect prices by anticipating future volatility,and that is manifested in the volume of activity in particular options.Some events, such as current earnings reports or new announcements,could cause higher volatility. The term implied is a substitute for anticipated, and aberrations in option pricing are indeed caused by optionstraders’ anticipation of future profit potential.
Free 20-Minute Delayed QuotesProfessional options traders employ many formulas to spot impliedvolatility and to select advantageously priced contracts. However, theselection does not have to be that difficult. If you study options on a comparative basis, you can pick higher than average premium levels with littletrouble. For example, the CBOE (Chicago Board Options Exchange) Website provides free option listings with 20-minute delay, so you can checkvarious option listings side by side. For example, you can limit your searchto (a) stocks you already own, (b) stocks with current market price within 5 points below option strike price, or (c) stocks with 6 months untilexpiration. These criteria provide comparable options, and the return oneach is easy to calculate. Divide option premium by the current marketvalue of the stock. (Don’t use your original basis in the stock, because yourbasis in various issues will be different, making the comparison less valid.)
Valuable ResourceThe CBOE website offers many free features for option trading,including listings for all options and LEAPS contracts. Checkhttp://www.cboe.com/home/ for more information.
The point is that you do not have to involve complex formula studies orbecome well versed in the technical side of options. The process is similar to picking stocks on the basis of high/low pricing, dividend yield,and trading range. When these analyses are performed comparatively,you can spot bargains easily.
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OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
The Black-Scholes ModelProfessional options traders, who use sophisticated methods for morespeculative trading, are likely to use advanced volatility measurementssuch as the well-known Black-Scholes formula. For most investors,Black-Scholes is too complex to be of value; a more practical approachis simple modeling based on current option premium and time to expiration, evaluated with an understanding of the proximity betweenstrike price and current value of the stock.The Black-Scholes model was introduced in 1973 in a paper publishedin Journal of Political Economy, titled “The Pricing of Options andCorporate Liabilities.” At that time, options were fairly recent devices inthe stock market, and the theory was devised to identify the theoreticalvalue of options based on stock price, strike price, volatility, time toexpiration, and short-term interest rates.Finding the fair value of options for your purposes does not necessarily require a complex level of analysis. You can simply review options onstocks you already own and keep comparative analysis simple. Selectingstocks for covered call writing should be based on several initialassumptions. First, you must be willing to accept exercise as one of thepossible outcomes. Exercise, if it does occur, creates a capital gain in thestock, and the rate of return on both stock and option justifies the covered call position. If you meet all of these tests with stocks in your portfolio, comparing current option prices in the same price and time rangeis a reliable method for seeking value.You should also question whether it is necessary to find high-pricedoptions. The rate of return on options could be high enough to justifycovered call writing, especially if you are working with stock that hasappreciated since your original purchase price. For example, if youbought stock at $34 per share and you’re thinking of selling 35 options,the capital gains margin is minimal; after trading costs, it will probablybe a net loss with such a close margin. But if you bought stock at $34 pershare and current market value is $74, selling a 75 call would create substantial profits. If exercised, you will earn a gross capital gain of $4,100in addition to dividend income and option premium. This outcome isalways possible with appreciated stock, so as long as the stock’s funda-
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mentals continue to work for you, writing covered calls is a winningidea. You will make a good return whether the option is exercised or not.
Identifying Your Market OpportunitiesConsidering the potential for gain with appreciated stock, covered callwriting can be a way to utilize paper profits to create additional income.In this situation, you do not need to seek high volatility in option premium; the potential return can work well for you even when impliedvolatility is low or nonexistent. As a general rule, you should establish aminimum return in order to justify covered call writing. To meet thatstandard, you may need to adjust both strike price and expiration. Forexample, you might decide to write covered calls only if and when youcan earn an annualized return of 10 percent or better.Another factor to consider is the level of time value involved. The listedoption is likely to have a lifespan of 8 months at the most, but if youstudy LEAPS calls as candidates for the covered call equation, you findthat time value is far higher when expiration is