Covered Call Portfolio

 

Our Covered Call portfolio uses call options to increase the income and decrease the volatility of a stock portfolio.  A call option gives the owner the right to buy a stock before a specified date (expiration) and at a specified price (strike).  In a covered call portfolio, this right is sold to someone else in exchange for income.

The strategy is executed by buying a stock and simultaneously selling a call option on that stock.  If the stock price is below the strike price at expiration, we usually continue to hold the stock and sell another call option to bring in more income.  If the stock price is above the strike price at expiration, the stock will be sold at the strike price.  Covered call portfolios typically go up less than the stock market during up markets and go down less than the stock market during down markets, which results in lower volatility.  Covered call portfolios are optimal in a relatively flat or slightly positive equity market environment.

We focus on call options that allow for modest price appreciation before the strike price and expire in 1-4 months.  Portfolios typically include approximately 15 covered call positions.

Investment Management

Covered Call vs.
Stock Only at Expiration