Covered Calls Strategy – Generating Income
The objective of this strategy is to strategically balance a portfolio in a combination of stocks and exchange traded funds (ETFs). I will then write covered calls on these positions to produce income which helps to partially protect downside. Covered calls generate additional income beyond dividends from the underlying stock, but it will limit gains if the investments appreciate beyond the strike price. A covered calls does not provide protection from significant downward price movement, but I will occasionally purchase put options to hedge against a decline in the ETF or stock. The downside protection for a covered call is limited to the amount of premium received from the sale of the covered calls.The upside profit potential if assigned is limited to the premium received from the call’s sale plus the difference between its strike price and the stock purchase price. Below is chart of the profit potential and loss potential of a covered call from the CBOE.com website.
Is a Covered Call Strategy right for you?
A covered call is a long position in a security and a short position in a call option on that security. Equity index covered calls are an attractive strategy to many investors because they have realized returns not much lower than those of the equity market but with much lower volatility. Writing covered calls only provides partial downside protection, stock performance is impacted by both market and company specific stock movements. An investor willing to limit upside profit potential on a specific stock holding in exchange for limited downside protection.
Covered calls generate income because the writer receives a cash premium for writing the call. However, the writer will be obligated to sell the stock at the call’s strike price if assigned; as a result, the writer gives up the chance to benefit from any appreciation above the strike price, and the sale of shares due to assignment may result in a taxable gain. I prefer to implement this strategy in an IRA account to minimize taxes.
Extensive Experience Writing Covered Calls
I have extensive experience writing covered calls. Currently, I manage over 75 client accounts with covered calls invested in their portfolios.
Please read the following page for important information on additional risks, tax consequences and a link to the booklet “Characteristics and Risks of Standardized Options”. http://theocc.com/publications/risks/riskchap1.jsp
There is more information on the CBOE website on options and covered calls. The links below are for information purposes only. CGF is not affiliated with and does not endorse, authorize or sponsor the following website or its respective sponsors. CGF is not responsible for the content of the website or the collection or use of information regarding the website’s users and/or members.
Facts and Myths About Options
Equity Options Strategies: Covered Calls
The CBOE S&P 500 BuyWrite Index
If you would like to know more about how my covered call strategy can support your investment goals, feel free to send an email to mitch@cgfadvisor.com or schedule a meeting.
If you prefer a more active approach to investment management or prefer low-cost ETFs, you can click here to learn more about my other customized investment strategies.
There is no assurance any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss.
Investors should consult with a tax advisor to determine how taxes may affect the outcome of the above strategy.