Dear Harry: We have owned different stocks for more than 10 years. My husband's broker has recently approached him in an attempt to have him "write covered calls." The way I understand this is that we sell someone the right (but not the obligation) to buy stock we own at a set price slightly above the current value of the stock. Of course, there is a time limit. If the value of the stock declines, the person who bought the call from us will not exercise it because he can buy the stock on the exchange for less. As a result, our cost of the stock will be reduced by the forfeited call. However, if the stock goes up in value, it will be bought from us at the call price. The broker says that this will give us a guaranteed gain if the stock goes up in value, and a reduced cost for a future sale if it does not. I'm hesitant. Help!
What Harry says: I'm not happy with selling covered calls, although they are far less speculative than uncovered ones in which you don't own the stock you're playing with. The results of these deals is that you get to hold stocks whose value declines and sell stocks that are going up in value. That's very similar to holding on to your losses and selling your gains: not a very wise investment philosophy. Too many people who sell covered calls forget that the person on the other end does not have the obligation to buy the stock. Before you get involved with calls and puts of any kind, be sure you know the risks.
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