This is another conservative maneuver and is best used when you are willing to buy a stock at a lower price than the current price.
First you have to decide on the stock. Personally, I like Campbell Soup (CPB). It currently pays $1.16 a year for a yield of 3.74%. However, I do not want to pay more than $29 so that my current yield would be 4.00%. If the order is entered as a buy/write at $28.80, the following happens. You end up buying the shares at $31 and selling the Jan 30 call for $2.20. Actually, you designate the month (Jan) and the strike price $30 for the call as well as the net debit in the account, in this case $28.80, which will give you a yield of 4.03%.
Here is your position: You will get 2 dividends ($.58 total) and have a capital loss of $1.00 ($31-$30) on the stock and a capital gain of $2.20 on the option IF the stock price stays above $30. IF it goes below $30, say to $29.95, the option buyer will not exercise and you will remain long the shares with a cost of $28.80. You can then sell a new call at say $30 or $31 and take in some more money further reducing your cost and in effect, increasing your yield, which is a lot better than what you can get in a money market account.
I picked Campbell Soup because I feel the stock is statistically cheap, the yield is good, the stock is optionable and I feel safe with their brands. Certainly this is no super growth company not is it a bomb. It is plain vanilla. The above example is true on August 16, 2011.
Now lets look at a much more volatile situation like Apple Inc AAPL. The stock closed at $380.48. You are willing to buy it at $335 (11.84%) less than the current price and sell it at $350 within the next 90 days. Apple does not pay any dividend. You enter the buy/write order with a net debit of $335. If Apple is above $350 on November 19th, you will have sold the stock for a profit of $15.00, 4.48% in 90 days. If the stock closes at say $349.95 or less, you will still own the shares at your $335 cost and you can sell another call for a big premium OR you can sell the stock at a nice profit and write a new buy/write at a cost of maybe $300.
You can use a buy/write to buy a stock at a discount by buying a stock and selling a call at the same time. On August 12, I put in an order to buy Campbell Soup (CPB) with a net cost of $29.75 when the stock 
price was $30.30. The call option was to be sold with a strike price of $32.00 and a time period of a shade over 30 days, namely September 17. There was no dividend to be earned in this period but the possible gain of 7.76% in one month on a beaten up stock price was appealing to me. Also, if the stock ended at $31.99 or less, I would still own the stock and I could then be in position to garner the XD date in October by selling the November call, which could be at any price I wish such as the November $33 or November $34 or even the November $31, which could be in the money for me resulting in a fatter premium and greater downside protection. Remember that you need to make up your own mind as to the direction of the stock price during the option period. The above strategies have limited profit potential but it offers a lot of protection and very reasonable gains. In the Campbell case, for me to earn 7.76% in a month is like 93.12% a year. In retrospect, I guess I should have looked at longer term Campbell options, which I tend to do in my tax deferred IRA accounts. These strategies are available in your tax-exempt account. You need to be approved for Level 2 option writing.
What would I do it the stock falls below $29.75? Well what I normally do is write short term covered calls at say 32 and I would go further out than 30 days, probably 90 days in order to get some more meaningful cash premium. Remember that you are like an insurance company when you sell an option. You are getting a premium and insuring the buyer. The shorter the time period, the quicker the time premium expires and you then gain flexibility as to your next move
My next article will explain the strategy of cash covered put writing, which is allowed in regular, IRA and 401K accounts including some stocks that I use.
If you have any questions or comments, please contact me through the Opportunist Magazine. I am available for option consulting for a fee.
Thank you
Warren Kaplan
Kaplan Asset Management
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