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You may have heard that options trading is too complex and risky, but that is a myth fueled by misinformation and inexperience. The truth is, options can play a strategic role in every portfolio, even for the most conservative investors. Options are flexible, versatile, and give us an important tool we can use to help manage our clients' risk.

Buy Stock - Write Covered Call

The hallmark of our firm is to invest in Blue Chip dividend paying stock and Exchange Traded Funds (ETFs) combined with an investment strategy called Covered Call Writing1. We write (sell) “in-the-money,” “at-the-money” and “out-of-the-money” covered calls for a majority of stocks & eligible ETFs in an account. This generates current income on a regular basis and provides limited protection against a market downturn. This strategy maybe used immediately after a stock purchase or as an exit strategy after a stock has moved upward. Our goal is to generate income consistent with our views of the underlying security.

Selling Cash-Secured Puts

Selling puts2 backed by a 100% Cash Reserves strategy may be used as an entry/purchase strategy into stock that meets our carefully screened criteria. We write cash secured puts when we are comfortable owning the underlying shares of our carefully screened stocks.

Triple Income Strategy

The Triple Income Strategy is a combination of selling a Cash-Secured Put on a dividend paying company and if we are put the stock immediately3 selling a Covered Call against it. Thus, you will be buying the stock at a discount since the option put strike we sell will be less than the current stock price. In addition, if we happen to be put the stock prior to the ex-date we will receive a dividend as well4.

Triple Income = Short Put Premium + Dividend + Covered Call Premium

The Protective Collar

A Protective Collar5 is established by holding shares of an underlying security, purchasing a protective put and writing a covered call in that security . This strategy offers the stock protection of purchasing a put option without the initial cash outlay because the premium received from writing the call can offset the put’s cost.

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1An option writer may be assigned an exercise at any time during the period the option is exercisable. The writer of a covered call forgoes the opportunity to benefit from an increase in the value of the underlying interest above the option price, but continues to bear the risk of a decline in the value of the underlying interest.

2As with uncovered calls, the risk of writing put options is substantial. The writer of a put option bears a risk of loss if the value of the underlying interest declines below the exercise price, and such loss could be substantial if the decline is significant.

3Depending on the investment advisor’s view of the underlying stock, a covered call may not always be written immediately.

4If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. If you purchase before the ex-dividend date, you get the dividend. 

5By implementing a collar, a long term stock holder forgoes any profit should the stock price appreciate beyond the striking price of the call written. In return, maximum downside protection is assured from the put strike purchased to zero.