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Chapter 3. Options in Context > Long-Term Goals as a Guiding Force

Long-Term Goals as a Guiding Force

Return comparisons, of course, are not the only forms of analysis needed to select an appropriate options strategy. Your long-term goals are the guiding force that ultimately determines whether or not a strategy makes sense. So, if you want to keep shares of stock and are willing to give up current returns from writing covered calls, that is a clear goal. In that situation, covered calls are inappropriate. However, if you see covered call writing as a means for (a) taking paper profits without selling stock, (b) providing downside protection through reducing your basis in stock, and (c) enhancing current income beyond dividends, then a covered-call-writing program can help you manage your portfolio, exploit temporary market price changes, and overcome the worry about paper profits and losses.

Working within a conservative framework is not always an absolute or easily defined criterion for how to invest or what products to select. Your level of conservatism changes with market circumstances. The various options strategies enable you to take advantage of market high points without disposing of stock you prefer to keep. Degrees of conservatism are possible and may not be fixed. It may be considered conservative to use options at market extremes as long as large amounts of capital are not risked or exercise of short positions produces an undesirable outcome. That is an individual decision, and no universal standard can identify whether or not it is appropriate.


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