{"id":2642,"date":"2017-05-02T22:57:51","date_gmt":"2017-05-03T02:57:51","guid":{"rendered":"https:\/\/blog.bradpine.com\/?p=2642"},"modified":"2017-05-02T22:57:51","modified_gmt":"2017-05-03T02:57:51","slug":"should-you-consider-a-covered-call-strategy-in-your-portfolio","status":"publish","type":"post","link":"https:\/\/blog.bradpine.com\/2017\/05\/02\/should-you-consider-a-covered-call-strategy-in-your-portfolio\/","title":{"rendered":"Should You Consider a Covered Call Strategy in Your Portfolio?"},"content":{"rendered":"

\"\"Several years ago (time flies!), I wrote an in-depth article<\/a> about selling covered calls for a group of clients who wanted to know more about the strategy. Since then, I\u2019ve had a number of conversations about it with investors looking to generate income from their portfolios or possibly unwind large positions<\/strong>.<\/h4>\n

It\u2019s time to revisit the topic in writing. Covered calls can be a powerful component to a larger investment strategy \u2013 but it\u2019s important to understand them first. Read on for a brief primer on the strategy and how to know if it might be right for you.<\/h4>\n

Let\u2019s jump right in.<\/h4>\n

What are covered calls and how do they work? <\/strong><\/span><\/h2>\n

When you own a call option, you have the right to buy shares of a particular security at a pre-determined price, the strike price<\/em>. By extension, when you sell<\/strong> a call option, you\u2019ve given someone else that right \u2013 so you\u2019re agreeing to sell your shares of a security at the stated strike price.<\/h4>\n

The \u201cCovered\u201d part just means that you already own the shares: you wouldn\u2019t need to go out into the market to get them if your option-holder exercises their right to buy.<\/h4>\n

Here\u2019s an example of how this might look:<\/strong><\/span><\/h2>\n

Say you own shares of the (fictional) Bradford Pine Wealth Group Corp (BPWG), which is trading at $30 per share. You decide that you want to write<\/em>, or sell, a call option that gives the holder the right to buy 1,000 shares from you at $33 per share.<\/h4>\n

The option is sold through the Options Clearing Corporation, the official clearinghouse for these trades. The market price of your BPWG option will usually be a fraction of how much it would cost to buy the 1,000 shares. Option prices vary and depend on how close the strike price is to the current share price, the option\u2019s expiration date, and a number of related factors.<\/h4>\n

After selling your BPWG option, you receive a payment (so-called income), and the option-holder will start monitoring the stock price to see what happens next.<\/h4>\n

If the option doesn\u2019t go \u201cin the money,\u201d<\/strong> meaning the share price doesn\u2019t rise above the strike price, you\u2019ll keep your income from the sale and the option itself will expire on the specified date you chose when you purchase the option.<\/h4>\n

If the stock price rises to $33 or higher<\/strong>, it might make sense for the option-holder to exercise their right to buy the shares. At that point, the Options Clearing Corporation will match the order with an appropriate seller (you or someone else) and initiate the transaction. (There are many other scenarios here however, for the purpose in keeping this simplistic, I will leave it at that).<\/h4>\n

Why was I careful to say that it might<\/u><\/em> make sense for the option-holder to buy? <\/strong><\/span><\/h2>\n

It\u2019s important to keep in mind that option-holders don\u2019t always exercise their rights, even if the share price is above the agreed-upon sales price.<\/h4>\n

That\u2019s because there are a few other factors involved. In addition to the stock\u2019s share price, the option-holder needs to consider how much they paid for the option and any additional transaction costs they\u2019ll face in buying and reselling the shares.<\/h4>\n

How can covered calls be used?<\/span> <\/strong><\/h2>\n

Covered call writing is not for everyone. But for certain investors it can make sense.<\/h4>\n

Generally speaking, there are three main benefits to writing covered calls: <\/strong><\/h4>\n