New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock investing

As I view it, there are two key questions relating to any complex investment strategy:1) Why? Why should I pursue this strategy versus my current (probably simpler) strategy?2) How? If the proposed strategy is indeed worthwhile, how can/should I implement it?This book does a reasonably good job of answering the second question, with details on how options work, and a discussion of things like getting approval to trade them, tax issues and the like. I'd read some similar material elsewhere (including CBOE's own site), but this book pulls together a lot of disparate information, and filled in some holes in my own somewhat meager understanding of the mechanics of trading options.However, showing HOW to trade options is not very important, IMO, if one cannot show WHY one should trade them in the first place.The book jacket is not very encouraging in this light - mentioning that "Returns of 10 to 15 percent per year in conservative accounts - and as much as 20, 40, or 60 percent per year in more aggressive accounts - are possible". Of course, like most investors, I would be thrilled to get 60 percent annual returns, but experience and reading have taught me that those advocating investment strategies and making claims of that magnitude are to be taken with a BIIIIIIG grain of salt.Within the book itself, sky-high claims like the above are (fortunately) not emphasized. But basically, three rationales are presented for covered call writing:1) Ability to obtain superior returns through knowledge of the future direction of a particular stock (i.e. if you think/know Microsoft will go up/down in the next month, then do XYZ...)2) Ability to use more leverage (there is a long discussion of how different scenarios are treated from a margin perspective, with an emphasis on controlling larger blocks of stock/options for a given starting investment)3) Reduction of risk, possibly without significant reduction of returnPersonally, I think that markets are reasonably efficient, and that I lack and real ability to outpredict the market with regards to returns on specific stocks (once I normalize for various risk characteristics). So rationale 1 above holds no appeal to me. [EDIT - 2011 follow up. I'd say I've softened my stance a bit with regards to prediction. But the main area where I've got first hand experience with market inefficiency in individual securities is closed end funds, which are not optionable in the U.S. (unless I've missed one or two), so my general thinking here re: options still stands reasonably well.]I am also not interested in increasing the leverage of my portfolio, and further, if I was, I think there are probably simpler/cheaper/more efficient means of doing so other than writing covered calls.That leaves rationale 3, which was what sparked my interest in reading this book. The author briefly discusses the BXM - an index created by the CBOE in conjunction with some research showing that a buy-write strategy (owning a broad index and mechanically writing calls against it) produces about the same return as owning the index itself, but does so with significantly less risk/volatility. But the authors' discussion of this research is short - about two and a half pages, and gives minimal or no mention of some important issues:1) The BXM strategy involves writing calls every month. This will create a variety of costs - brokerage fees, spread/transaction costs, taxes, and time. While these factors may affect any mechanical strategy (including indexing itself), they are likely to be much more severe for the BXM strategy.2) The BXM strategy is a backtested strategy. It's relatively easy to find strategies that would have outperformed the market in the past, given what we know now (Consider the MICROSO strategy - buy at IPO any stock that begins with the letters MICROSO), but one should approach such strategies with caution. It's much harder to identify and implement strategies that will work for the FUTURE, and that are in fact proven to do so over the subsequent decade or two.3) The market itself may have changed. Writing options is relatively more attractive if call premiums are high. It appears, based on evidence presented in this book and elsewhere that I've seen, that call premiums have generally been higher than they *should* have been (per Black-Scholes). This, in turn, has made call-writing more profitable than it otherwise might have been. But markets change over time, and it's quite possible that call premiums might trend downward (or may have already done so), towards, or conceivably even below, 'true value'. I don't know if this is the case, but it's something for a potential investor to be concerned about, and isn't well addressed in the book.The authors' also conduct their own study looking at writing options on a basket of individual stocks. While the results are interesting, the study is flawed - they emphasize tech stocks, and in their limited pool of 20 companies studied, one they've chosen is Microsoft, starting in 1988! At that time, I think, Microsoft was a relatively small company (it had only gone public in 1986), and it seems unlikely that someone selecting a portfolio of 20 (hopefully representative) companies to own and write options on would have chosen Microsoft. For what it's worth, the study finds that a covered call strategy on Microsoft underperforms buy and hold in absolute returns, which should hardly be surprising (writing covered calls means giving up some upside, and Microsoft had a LOT of upside during the time period covered), though there are other stocks in the study for which the strategy had better results. But the basic problem is that the stocks selected seem unlikely to have been representative of what a conservative to moderate investor would have chosen at the beginning of the study, and thus it's not really possible to draw broad conclusions.====OK, moving on... The book is now a few years old, and thus misses some recent market changes. There are several funds that now implement buy-write strategies, making it much simpler for investors to access these strategies (I don't *think* the authors mention any of these funds, but it's possible I've forgotten a brief mention somewhere in the book). From my brief inspection of the results of some of these funds, they haven't done very well so far, which bodes ill for individual investors thinking they can implement such a strategy on their own.Anyways, I've devoted a lot of pixels to picking at the book. In my opinion, it fails to prove that the strategy it advocates is a good one. However, that doesn't mean that the strategy ISN'T good, only that the book fails to prove things one way or the other. But if you're convinced by other evidence that covered call writing is a good strategy, or if you simply want to take your chances (I don't advocate the latter), then the book does at least offer a good overview of the mechanics involved. That's why I give it 3 stars...

I've been investing in stocks for 20+ years and consider myself a conservative investor. Never tried options of any sort due to unfamiliarity. This book gave a great overview of the pros/cons of covered calls, and general factors to consider when going the route of deploying covered call strategies. I was surprised to learn that covered call investing can actually be considered more conservative than pure equity investing, and can lead to less volatility in returns, including lower downside in bear markets.Perhaps you could find similar information via Google. But this book lays everything out in a cohesive, and easy to digest way. The $15-20 for the book will easily be recouped from my first covered call premium.

Was too simple - should have just done research online

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.

Pretty good, pretty good. Slightly dated but quite comprehensive. Especially good if you are already well-practiced with options (if not I suspect all of the excellent material in this book could be a bit overwhelming). Even though this was written before weekly options were available I would still consider this a definite recommend - what I learned here has already been profitable for me.

As an IBD user, it was pretty interesting to learn a new method of investing. This method is more of averaging down and hoping to make a profit when and if the stock recovers and a covered call is sold. His method of "rolling" the call is perfect and on point. I would recommend.

Well written for the beginner wishing to sell calls against stock held. shows both the possible positive and negative results (in other words, is not rah rah), but it would be nice if it were updated and included more about selling puts as part of the plan for cash flow and a means of purchasing stocks at a discount.

Easy to read. Informative and helpful. A very even sided look into this option trade. I explains well the pros and cons of the trade. I think all option books should be focused on only one type of trade like book is. The other book I would recommend is profiting with iron condor options this book also concentrates on one strategy.

good book

This is the best book I have found on covered calls.Good examples make it an easier read.Recommended to anyone interested in the subject.