McMillan Analysis Corp - Covered Writing Against LEAPS
We receive a lot of questions here at McMillan Analysis Corporation – most of them come in from the Q&A section on our web site. The more generic (and interesting) questions and answers get posted on the site. Those that are specific get a personal email answer. One way or the other, they all receive an answer – although we do not comment on specific stocks or specific positions in your trading account. We also hear a number of questions at seminars (so far this year, we’ve attended four seminars), and that is where we got the idea for this article. One topic that people seem to want to discuss is that of “covered writing against LEAPS.” Many people think this strategy has little or no risk, based on some sort of historical studies.
I don’t know about the studies, but I do know that every strategy has risk – even “risk-free arbitrage” – whether it’s a market risk, a credit risk, or a back office (delivery) risk. Most certainly, writing calls against LEAPS has risk. Let’s examine the strategy as most people attempt to apply it, in order to detail the risks and rewards.
The entire post can be accessed at this link.