covered call option

My broker suggested that I write covered call options. Is this a good idea, or is she just trying to generate extra commission income for herself?

In general, writing covered calls is a good idea for those looking to reduce risk and generate extra cash flow. Selling calls provides a bit of downside protection (equal to the option premium received). The option writer also enjoys increased cash flow, as the option premium is received when the option is sold and can be used however the writer wishes—it can be spent, reinvested, etc. Writing calls is a very sound investment technique; however, there are issues to consider. Calls are best written on shares the investor is willing to sell and at a strike price the investor is comfortable with. In addition, investors should be cognizant of the potential tax ramifications of their option strategies. Selling calls against very low-basis stock can result in large taxable gains if the option is exercised. Also, certain covered calls—depending on strike price and time until expiration—can alter the holding period of the underlying common shares. Similarly, certain calls can eliminate the tax benefits of qualified dividends received on the underlying shares.

Noah L. Myers, CFP^®, Principal and Chief Investment Officer, MiddleCove Capital, Centerbrook, CT