Taking Cover with Covered Calls

The worst of the bear market is behind us, we hope, but that doesn't mean a 1990s-style bull market is ahead. A slower economy, rising energy costs, and badly beaten tech and telecom sectors are likely to keep gains in check. Such an environment is ideal for "covered call writing"--generating extra income by selling call options on stocks you own.

Sure, options are derivatives, and many equate derivatives with risk. But writing covered calls is a relatively conservative strategy. You can make money even if the market doesn't rise. And covered calls provide some protection against falling stock prices, though generally not enough to offset a steep plunge. Still, it's "safer than holding the stock outright," says Todd Salamone, research director at Schaeffer's Investment Research, a Cincinnati publisher that specializes in options.