CHAPTER 6Diagonal Spreads

Covered writing is probably the preferred conservative option strategy of numerous investors. For certain individuals, it is the only option strategy worth considering. Against a long stock position (either shares already held or shares purchased for the purpose of establishing the position), call options are written. For example, someone holding 500 shares of Basic Tech Manufacturing (BTM), currently trading at $43, writes 5 of the 2-month 45 calls for a premium of $1.35. If in 60 days, at option expiration, BTM is trading above the exercise price of $45, the shares will be called away, i.e., the investor will be forced to sell his shares at $45 no matter how high their trading price. On the other hand, if the stock ...

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