Dow Jones 7740.03 +66.04 1:00 pm PST, March 7, 2003  NASDAQ 1305.29 +2.40 For info, visit access.smallcapnetwork.com S & P 500 828.89 +6.79 To be removed, please click here Russell 2000 354.18 +0.34 VOLUME 03: ISSUE 04  CYA--Covering your assets. There's no reason to be a hero in this market. Full or partial hedges may make sense. Not to mention snapping up some incremental income to enhance the return on long-term positions.  Last week we talked about how to cover your assets by purchasing put options. With the oil sector roiling around, protecting the majority of the downside risk makes sense, but there are other ways to hedge risk, although not as definitive. First, a word about option premiums: the more volatile an underlying security or commodity, the higher the premium (or price) of an option. Each stock has a beta, which is the number assigned to give investors a snapshot of how its movement relates to the market as a whole. For instance if the market has a beta of 1, a stock may have a number lower or higher than that depending on its trading activity. Shell (SC: NYSE), our example from last week, has a beta of .85 while Microsoft (MSFT: NASDAQ) chimes in with a 1.75. Obviously the expectations of Microsoft moving sharply one way or another is roughly twice that of Shell. Ergo, of the two, MSFT would have the significantly higher option premiums. Go ahead, Call me To add incremental income to a position, an investor may decide to sell call options (also know as writing an option) against a stock position. If we use, say, 1000 shares of Shell in our example, an investor may wish to sell 10 August 40 calls (trading at 60 cents) against that holding. By doing this, the investor is telling the buyer of those calls that s(he) will sell Shell at $40 until the options' expiry date in August. Shell shares currently trade at $34.65. For assuming that obligation, the holder of the stock receives 60 cents a share or $600, which is the option seller's to keep no matter what. If Shell is trading under $40 come August, the holder will likely retain the shares since there is not much point in the call buyer taking them at $40. If, however, the shares are above $40 during the life of the options and the call buyer exercises, the stockholder is obligated to sell at $40. So, when the shares are delivered at $40, the seller gets that $40 a share and keeps the 60 cents as well. The sale price, before commissions, would be $40.60 or a 16 percent return on the position if the shares were originally purchased at around $35-more if the shares were purchased lower.  If the shares were to go to $50 prior to the August expiry, the holder is obligated to sell at $40, painful as it may be.  Second verse, same as the first Selling options against a position has been likened to mortgaging one's upside potential. True enough, but an investor can mitigate that risk by not selling options on an entire stock position. That way, although some would sell at $40, the balance would participate in further upside. While 60 cents a share isn't much, view it as a dividend enhancement. If you happen to lose the shares at $40, it's a decent return nonetheless-16 percent (before commissions) in 6 months. And should that August option expire because Shell hasn't risen above $40 in the interim, you can repeat the process. Covered Call writing is useful and, given what the market's done over the last couple of years could have mitigated some portfolio damage. What it won't do, however, is provide the same level of protection and retention of upside potential that the 'insurance put' purchase will do. With covered call writing, you may lose the shares before you want to if the stock moves up. If Shell goes south, that 60 cents worth of option premium won't afford much protection on the downside. If the shares drop to $25, you're in for pretty much the full ride. Boring markets are good. The best type of market in which to do covered call writing looks and smells much like the market we're in now-range-bound and with a bias to going nowhere. The only caveat is that it's bound to break one way or the other-likely due to geopolitical considerations-and the trick is to protect yourself without giving away your upside should the market pop. Perhaps, on that 1000 shares of Shell, one could buy 5 August 30 puts and sell 5 August 40 calls. That way, you'd have some downside protection and the cost of the puts would be offset by the call sale. If the shares rocket, you'll lose one-half of your position at $40, but you'll still have half left to ride the bull.  Options can be complex and they move quickly. But once you understand the applications, they can be useful vehicles to reduce risk-or even take a calculated risk. In the case of covered call writing they can provide some incremental income on static positions while we wait for better markets. The key to a successful option strategy is a balance between having an opinion on a stock and acting accordingly. Then be ready to make adjustments as the situation unfolds. Good luck. D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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