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| top 10 covered call positions | |
|---|---|
| Amgen | Microsoft |
| Exxon Mobil | Danaher |
| FedEx | Johnson & Johnson |
| Wells Fargo | AT&T |
| JPMorgan Chase | Oracle |
What is a Covered Call?
A covered call portfolio is constructed by selling call options on stocks that are owned in a portfolio. The sale of call options produces income, which is received in exchange for future price appreciation over the strike price of the call option. The goal of our covered call portfolio is to enhance total return by generating income and providing limited downside protection.
What is a Call Option?
A call option gives the owner the right to buy a stock before a specified date (expiration) and at a specified price (strike price). In a covered call portfolio, this right is sold to someone else in exchange for income.
Do options increase the risk in my investment portfolio?
While certain option strategies can be high risk, covered call writing actually lowers the risk of a stock portfolio. The income received from selling call options dampens the volatility of a portfolio, which means the portfolio loses less money in bear markets and makes less money in bull markets. A covered call portfolio is an equity strategy, and therefore does contain risk, however all else being equal, a covered call position has less risk than owning the stock outright.
What type of stocks are best for this strategy?
We identify stocks with minimal downside risk to current price levels and modest upside potential. Large cap stocks are targeted due to the significant liquidity advantage in the options market that large cap stocks hold over small caps. The universe of large cap stocks that are candidates for covered call portfolios is derived from our core, large-cap quality growth equity process.
When is this strategy most effective?
A covered call strategy works best in a relatively flat or slightly positive market environment. In these scenarios, the owner of a covered call portfolio receives income from writing the call, dividend income from the underlying stock, and modest appreciation potential of the underlying shares.
Net Returns for the Willingdon Wealth Management Covered Call Portfolio
as of December 31, 2011
Annualized Performance
Cumulative Performance
| Annualized | 3 Year | 5 Year | Since Inception |
| WWM Covered Call | 9.2% | 1.9% | 4.3% |
| CBOE Buy/Write Index | 12.1% | 1.4% | 3.0% |
| S&P 500 | 14.1% | -0.3% | 2.7% |
| Cumulative | 3 Year | 5 Year | Since Inception |
| WWM Covered Call | 30.4% | 10.0% | 27.7% |
| CBOE Buy/Write Index | 40.9% | 7.2% | 18.9% |
| S&P 500 | 48.6% | -1.3% | 16.7% |
Growth of $1M - Last 5 Years
* Portfolio Inception Date = 9/30/05
* WWM covered call returns represent total covered call composite returns. Returns are net of all management fees and transaction costs. All fully discretionary covered call portfolios are included in the composite. The CBOE Buy/Write Index is a benchmark index designed to track the performance of a buy-write (covered call) strategy on the S&P 500 index. The S&P 500 is a proxy for the US equity market. Past performance is not a guarantee of future results.
