With the expertise of our Options Strategist and the high quality of our electronic trading platform, our clients have consistently benefited from quality ideas and executions. When used properly, option strategies have the potential to help clients enhance portfolio returns and to protect portfolio gains. We offer our clients the ability to trade nearly any domestic option contracts and to implement almost any available strategy, we focus the majority of our attention on the most conservative option strategies that provide our clients with the ability to enhance returns and manage risk in their portfolios over the long-term. This strategy, which is one of the most common strategies used today, is called covered call writing.

The use of equity options has grown since they were first introduced in the 1970s. At Scott & Stringfellow, our brokers are increasingly utilizing covered calls as a tool for managing the amount of risk their clients are exposed to in holding a portfolio of equities. By selling a covered call against an equity position, an investor gives another investor the right, but not the obligation, to buy their stock at a specific price (the strike price) up until a specific date in the future (the expiration date). In return for giving someone else this right, the seller of the call collects a cash premium upfront.

We can look to a hypothetical real estate scenario to draw a simple analogy to covered call writing. Suppose an individual is looking to sell a piece of property with a current market value of $175,000 for no less than $200,000. Suppose another investor feels that the market value of this same property is going to appreciate significantly above $200,000 over the next six months. This investor is willing to pay the owner $5,000 today for the right, but not the obligation, to buy the property for $200,000 at any point over the next sixth months. The investor collecting the $5,000 keeps this payment regardless of whether or not the property is sold for $200,000. Covered calls function in the same way. The seller of a call settles for a limited amount of appreciation in exchange for a cash premium up-front. While a covered call strategy may not be suitable for outright bullish investors who may be averse to limiting their potential appreciation in an equity position, it may be attractive to neutral to moderately bullish investors who desire:

1. Limited protection against downside movements in their equity holdings
2. Additional income for a portfolio of equities
3. The potential for reduced exposure to volatility in a portfolio of equities

The income generated from selling covered calls provides limited downside protection for the underlying equity position and may reduce the volatility of that position. Should the underlying stock fall to zero, an investor's downside exposure to their underlying stock position has been reduced 1 for 1 with the amount of cash received from the sale of the covered call. The trade-off is that the investor limits their potential appreciation in the underlying stock up to the strike price of this call option.  Again, this may not be an attractive alternative for outright bullish investors, as they could be precluded for benefiting from a significant rise in the underlying stock. When evaluating any investment strategy, it is very important to identify its place on the risk spectrum. Selling a covered call is actually more conservative than owning the underlying equity outright.

Many investors assume that a strategy that limits appreciation potential would dramatically underperform the market long term. The Chicago Board Options Exchange (CBOE) created a benchmark called the CBOE S&P 500 Buy-Write Index (BXM) that measures one such variation. Historical results in the BXM from June of 1998 to March of 2004 shows that this approach may allow an investor to outperform the market and do so with less volatility. Please visit the CBOE website at www.cboe.com for more information and complete historical data.

In summary, covered call writing can be an effective means of generating extra cash flow and reducing downside exposure and volatility within a portfolio of equities, while still allowing for reasonable but limited growth of capital.

Prior to buying or selling options, you should consult with your financial advisor about all of the potential risks and benefits associated with a particular strategy. This literature does not purport to be a complex description of the securities markets or any risks associated with trading options and derivatives. Since options strategies involve unique risk considerations, tax consequences, and commission costs, options are not suitable for all investors. Investors could lose some or all of their investments. Prior to receiving approval for options trading, investors must receive a copy of the Characteristics & Risks of Standardized Options, which can be provided to you by your financial advisor. Finally, you should consult a tax expert regarding any potential tax implications involved with any options strategy prior to placing a trade.