Enhanced Income (Covered Call) Portfolios
By selling covered calls, holders of individual stock securities can often:
- Generate additional income
- Lower volatility on stock portfolios
What are covered calls?
A strategy whereby an investor holds a long position in a publicly traded stock and writes (sells) call options on that same stock in an attempt to generate increased income from it. This is often employed when an investor has a short-term neutral view on the stock and does not expect its price to fluctuate much in the next few months.
How does it work?
- If you own a stock, someone is willing to:
- Pay you money now (called a premium)
- For the right to buy that stock from you (call the stock from you)
- At a specific price (called the strike price)
- For a specific period of time (until the option expiration date)