Barnes Capital LLC offers covered call writing, a sophisticated hedging strategy.  Covered call writing (CCW) is viewed by the Options Clearing Corporation as more conservative than holding a stock long because the strategy reduces portfolio volatility.  The CCW strategy is managed by Rob Ballan of RB Capital Management.  Rob has been managing covered call writing portfolios for 10+ years.

How Does Covered-Call Writing Work?

• When you write a covered call, you give someone else the right to purchase 100-share lots of your stock or ETF at a specified price (the strike price) by specified date (the expiration date).
• You receive a payment for selling the option. This is called the premium.
• If the stock price stays below the strike price, your option is “out of the money” and will most likely expire unexercised. In this case you keep both your stock and the premium.
• If the stock price does rise above the strike price, your option is “in the money” and the stock can be called away from you. In that case, you will get both the rise in stock price to the strike price and the premium.
• Regardless whether the option is exercised or not, you always keep the option premium.

Example

• Starting market price per share of XYZ Corporation is $45.
• Receive $300 premium for selling one February XYZ 50 call option at $3.
  If the price of XYZ is still $45 at the expiration date, then the shares are not called away and the call writer keeps the $3 per share premium. The total amount received by the writer is $3 per share.
• The call buyer has paid $3 per share for the call option and does not exercise the option to call the stock away at $50. The total amount paid and total loss by the buyer is $3 per share.
• CCW works well when the market moves less than 20% up or down annually.
• The premiums generated by writing covered calls is a source of income.