Covered Calls
Writing covered calls is the most popular option strategy used in today’s markets.
Individual investors and professional investment advisors use Covered Calls as a conservative investment strategy that provides the opportunity for consistent, double-digit investment returns in a flat to slow growth market… and protection in a declining market.
Our Covered Call Strategy: Buy ETF Shares. Sell Covered Calls. Get Paid.
A covered call writer or “seller” is an investor who sells an option to buy their shares. In our model, we recommend writing covered calls on Exchange Traded Funds, or ETFs.
Selling a covered call gives the buyer the right to buy from you at a given price. If that price is reached you can expect it will be exercised at expiration, requiring you to sell the stock at the agreed price – but in the meantime you get paid upfront!
Our covered call strategy is an investment technique where you own a stock or basket of stocks (ETFs) and write call options that cover your underlying ETF fund position. This covered call technique can be used to enhance portfolio returns under most market conditions while reducing volatility and downside risk. In down markets, the option premium cushions the effect of price declines.
And in the meantime, you get paid.
Here’s the bottom line: By writing covered calls on Exchange Traded Funds, investors and advisors are able to prepare for the best while protecting themselves from the worst. Our strategy is designed to create cash flow, diversifying your portfolio, and protect your downside.
How Does Our Covered Call Strategy Work?
First, investors purchase shares in an Exchange Traded Fund or Funds. The investor then writes covered calls on all or most of the underlying ETFs. (That way the options written are “covered.”)
Writing covered calls generates an initial inflow of cash for the investor.
Then, over time, the underlying ETF share price can only go up, down or sideways.
Others may believe the share price will go up, but may not have the funds to buy and hold the shares while they wait for the share price to go up so they can profit take a profit; instead, they may pay you a premium, say 2% to 5% of the share price, to buy your shares at a future date and at a price you both agree upon. You keep the premium for writing the covered call, no matter what happens – once you write a covered call those funds are yours to do with as you wish.
If the share price does go up the option buyer may then exercise the option, buying your shares at the agreed-upon price (called the “strike price.”) You receive the strike price – and of course keep the premium for the covered call you wrote.
On the other hand, the buyer may not exercise the option before the expiration date because the share price went down or sideways; in that case you keep the shares. You can then write another covered call to another option buyer.
The risk you take is that the buyer may exercise the option and you lose some amount of upside potential. Of course, you also made a profit on the rise in value – and on the premium you received when you wrote the covered call.
Covered Calls and Exchange Traded Funds
On their own, covered calls and Exchange Traded Funds are two of the most innovative and exciting securities products available. Combined, they provide the potential for double-digit growth, portfolio diversification, and downside protection.
Over the past several years Exchange Traded Funds have become one of the fastest growing segments of the fund industry, experts estimate total ETF investments will reach $1 trillion by the end of 2009. ETFs promise a number of benefits (see ETFs).
ETFs offer the diversification and relative security inherent from investing in a traditional mutual fund while allowing investors the freedom to buy and sell ETF shares just as they would shares of a publicly traded company.
ETFs also typically carry low expense ratios, low turnover, and an advantageous tax structure and ETFs allow covered call (mutual funds do not).
Want to learn more? Check out our free Covered Call ebook
