New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock Investing (Bloomberg Financial) [Hardcover]

I liked this book and would recommend it to those interested in covered call writing. There are a few things to keep in mind while reading this book:

1- McMillan is a very well established authority on option strategies, I remember reading his options books way back in 1984, when I was the local options specialist at Dean Witter. However, if you read his comments on covered call writing in his other books, he's much more guarded with his support than he is in this text.

2- Nowhere in the book do the authors discuss the extreme increase in time and especially paperwork that is required to successfully implement this strategy. I've always thought of managing an equity portfolio as investing (mostly passive), managing covered call positions is more like work (trading takes lots of time and effort to do it right). That's OK, call writing also reduces risk and gives you a lot more control, but be prepared to invest a lot of your time.

3- In my experience, most people really have a hard time with this strategy. Yes, it's easy to implement, but most dedicated options traders find this a bit too basic for their interests, and it ties up too much capital. Most equity investors have a hard time with the amount of work, loss of long-term capital gains impacts, tax reporting headaches and giving up some appreciation potential.

4- The 20 stock study described in the book is very misleading. For some reason the positions with 163 months of data show covered writing (CW) underperforming a buy-and-hold (B&H) strategy by about 700 basis points. I don't know if this is due to a flaw in the data or something to do with option premiums in the early years of the study. Data from comparing
CW returns to BH returns for periods less than 163 months show identical returns between the two strategies. This is consistent with results from more rigorous academic studies, which generally show underperformance of covered writing of 30 to 50 basis points. This is also consistent with my own experience. This makes sense, since covered writing is slightly to moderately less risky than buy-and-hold investing, the returns should be similar or slightly lower.

5- I was amused at the author's description of how he traded a client account. Frankly, trading in the way described is not a viable approach to investing. Covered call and cash backed put writing is best used to hedge and to reduce the volatility of returns. That's a whole different ballgame from the way the author traded the account in the book.

The people who usually succeed with covered call writing tend to be really good percentage thinkers, very organized at tracking and analyzing investment results, and good with the basic record keeping. Those who thrive at it really love it, but it's not for everyone.

I wish the book would have addressed these issues. Also, there is a lot more strategy involved in managing a covered write portfolio than was discussed in this book. To my mind, the subject was over-simplified here. I think the book also should have spent more time suggesting cash-backed put writing, which is the sister strategy (and has equivalent risk and returns) to covered call writing.

Still, it's a very good book, and one I recommend without hesitation. I'm a big advocate of covered call writing and cash-backed put writing for those who are willing to take the plunge.

I also highly recommend The Conservative Investor's Guide to Trading Options by Leroy Gross (with a forward also by Larry McMillan).

This is a good book if you already have a grasp of the basic concepts of covered call writing but are more interested in the details of why covered call writing works rather than how to use the concept to make money. The author spends a lot of time going through esoteric details on black scholes models and comparisons between the buy and hold and covered call strategy but little time is spent on providing real market examples on how to use the concepts in the book to make money. As an investor and trader my main purpose of reading any book is to learn the "how to" practical concepts that work in real market situations to enhance my profits and this is where this book is deficient. Furthermore this book does not get into the art of picking the right stocks and the timing criteria needed to decide when a covered call is a good strategy and when it is a losing one.
This book deserves at least 4 stars for explaining the covered call concept in great details and proving its usefulness. To make the best use of this book you need to couple it with one that will give more practical examples on using these concepts in real life situations in addition to strategies of picking the right stocks to write covered calls on and critical timing strategies. The book that worked best for me was the recently published September 2003 Second Edition "generate thousands on your stocks without selling them " By Elias. Elias's book has extensive real market examples with many innovative and profitable concepts.

This is probably not the first book you want to buy if you are like most stock investors who are trying to grasp covered writing and get started for yourself. It was written by a good technician, not a great teacher. I have no doubt that everything said in this book is accurate, but much of the information presented is on the fringe of what is necessary for most covered writers to learn how to get the job done. For me, a more simplified, step-by-step discussion on "how" would have helped with less discussion on "why." For those who want it, the technical aspects are done in great detail (e.g., 1. much discussion about Black Scholes valuation formula, 2. an enormous amount of space devoted to going back in history to demonstrate that covered writing can match returns of simple buy-and-hold stock ownership. Why spend time and space on this when knowledgeable investors are saying that stock performance in the next decades won't be anything like the past ones?). There are sections devoted to subjects that don't have anything to do with covered writing, but unfortunately less than one page was given to covered writing on Exchange Traded Funds and hot items like the QQQ. For me at least, I thought that the implementation section was the least useful part of the book. This book might help if you are interested in some of the more complex and esoteric aspects.