A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

by Burton G. Malkiel

If the price of Halliburton stock stays within 20 percent of the starting price within the three-month period, you are much better off selling a call option on the stock and collecting the premium as opposed to paying for a put. Indeed, even if the price of Halliburton declines to $32, a 20 percent decline, you are in exactly the same position using either strategy. Thus, as long as you think Halliburton will sell within a range of plus or minus 20 percent within a three-month period, writing covered calls offers some protection and is never a poorer strategy. Only if Halliburton stock rises or falls more than 20 percent would put buying be better. The put-buying strategy produces more protection against very severe price declines and allows the investor to profit more in the event of a very large price increase.