For certain clients, covered call writing may be an appropriate strategy to complement an existing equity portfolio.
A covered call involves owning shares of a stock while simultaneously selling a call option on those shares. The strategy is generally used to generate additional income through the option premium received in exchange for agreeing to sell the underlying shares at a predetermined price if the option is exercised.
Depending on an investor's objectives and market outlook, covered calls may be considered when seeking to:
- Generate additional portfolio income
- Establish a defined exit price for a stock position
- Potentially offset a portion of modest declines through option premium received
Covered call writing also involves important trade-offs. While the option premium provides additional income, the strategy limits participation in gains above the option's strike price and does not protect against significant declines in the value of the underlying security. Investors should also consider the potential tax consequences and the possibility that shares may be called away prior to expiration.
Because every investor's financial circumstances, investment objectives, and risk tolerance are different, covered call writing is not appropriate for every investor. We evaluate the strategy within the context of a client's overall investment goals before making any recommendation.
If you would like to discuss whether covered call writing may be appropriate for your portfolio, please contact our team.
Important Information
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, investors should receive and carefully review Characteristics and Risks of Standardized Options (the Options Disclosure Document), available from your Financial Advisor or directly from The Options Clearing Corporation at:
https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Covered call writing limits upside participation in the underlying security and does not protect against significant declines in the value of the underlying investment. Investment returns are not guaranteed, and investors may experience gains or losses. Tax consequences will vary based on individual circumstances. Investors should consult their tax advisor regarding the application of tax laws to their specific situation.
Investors interested in learning more about options may visit The Options Clearing Corporation's Characteristics and Risks of Standardized Options and Cboe's educational resources on options strategies at:
- The Options Clearing Corporation: https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
- Cboe Options Education: https://www.cboe.com/optionsinstitute/
