Friday, July 1, 2011

3 types of ROI from owning a stock

"Some share holders of certain stocks (say XYZ) are now writing (i.e. selling) OTM call options to get cash income". Classic buy-write (covered call) strategy, as illustrated on Barron's.

These investors aren't concerned about limiting potential upside. They want the cash income in the form of premium. If they are greedy, they could write slightly OTM calls.

The XYZ stock is probably paying insufficient dividend, if you ask such an investor.

This strategy is popular when implied volatility rises, i.e. extrinsic value rises (OTM valuation is purely extrinsic).

Now I see that buying a stock can provide 3 types of returns
1) capital gain
2) dividend
3) premium income by selling call options

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