Covered call strategies help to enhance cash flow for investors
looking for income solutions.
The search for yield has become increasingly difficult with yields remaining very low relative to historical norms. Aging clients, and pre-retirees require higher yield and sustainable monthly income.
In recent years there has been a growing demand for covered call solutions within managed products and for good reason as these products offer a number of benefits;
Covered call strategies work by holding a stock and selling (“writing”) a call option on the underlying stock. Selling a call option gives the buyer the ability to purchase the stock at a later date at an agreed upon price (the “strike price”). By selling the option the portfolio receives a premium, providing additional cash flow.
Out-of-the-money: A call option is said to be the out-of-money when the price of the underlying stock is lower than the strike price. If this difference is substantial, the option is deeply out-of-the-money.
At-the-money: A call option is said to be the at-the-money when the price of the underlying stock is identical or rela- tively close to the option strike price.
In-the-money: A call option is said to be the in-the-money when the price of the underlying stock is higher than the strike price. If this difference is substantial, the option is deeply in-the-money.
Be comfortable with the underlying portfolio as an invest- ment, and review the dividend yield, which may provide a strong starting cash-flow. Consider the volatility of the underlying stocks, while higher volatility may lead to higher premiums, they may be subject to greater down- side moves.
Out of the Money (OTM) options allow for some market movement.
Consider how much of the portfolio is overwritten. By not writing on the entire portfolio, more upside is available.
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