Skip to main content

Sound Advice: August 30, 2023

Covered calls: Current Income with Reduced Risk?

Covered-call investing is a popular options strategy that offers several advantages for investors seeking to generate income and potentially reduce risk.  Here are some of the advantages of covered-call investing:

1.     Income generation: The primary advantage of covered-call investing is the ability to generate income from the premiums received from selling call options.  When you own a stock (or a stock index or exchange-traded fund, i.e., ETF), you can sell call options against that position.  By selling calls, you collect premiums from option buyers who pay for the right to purchase the stock or ETF from you at a predetermined price (strike price) within a specific time frame (expiration date).

2.     Enhanced Return: The premiums received from selling covered calls can enhance the overall return of your investment portfolio.  Even if the stock’s price remains relatively flat, the income generated from selling call options can provide a steady stream of cash flow.

3.     Risk mitigation: Selling covered calls can provide some downside protection to your stock position.  The premiums received reduced the effective cost basis of the stock.  If the stock price declines slightly, the option premium can offset some of the losses.

4.     Lower volatility: Covered-call strategies tend to exhibit lower volatility compared to owning stock outright.  The income generated from selling calls can help smooth out returns and reduce the impact of short-term price fluctuations.

5.     Flexibility: Covered-call strategies offer flexibility, allowing investors to adapt to various market conditions.  Investors can adjust the strike price and expiration date of the call options based on their outlook for the stock and the market.

6.     Diversification: By incorporating covered-call strategies into a diversified investment portfolio, investors can potentially enhance returns while managing risk across different market conditions.

7.     Passive Approach: Covered-call investing can be a relatively passive approach, particularly for long-term investors.  Once the options are sold, investors can sit back and collect premiums without needing to actively manage their positions on a daily basis.

DDespite the advantages, it's essential to note that covered-call investing also has some limitations and risks.  For example, if the stock price rises substantially, you may miss out on potential gains beyond the strike price.  Additionally, covered-call strategies may not provide as much protection during severe market downturns.  As with any investment strategy, it's essential to understand the risk and potential rewards before implementing covered-call strategies in your portfolio.

N. Russell Wayne, CFP

 AAny questions?  Please contact me at nrwayne@soundasset.com





Comments

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...