Covered Call Strategy
Income Generation and Portfolio Diversification
The goal of our covered call portfolio is to enhance total return by generating income and providing limited downside protection. Income from selling the call options is received in exchange for future price appreciation over the strike price of the call option. The strategy is most beneficial during a period of flat to slightly positive market returns as the client collects both dividends on the underlying shares and income from selling the call options. We also build customized option strategies based on individual client needs.
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.
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.
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 reduces 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.
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.
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.