Why Income and Dividend Investors Should Consider a Covered Call Strategy

With the stock markets close to making new three year highs, many investors looking for income and capital preservation should consider the covered call strategy on a portion of their equity holdings. The CBOE S&P 500 Buywrite Index (BXM) has meaningfully outperformed a long only investment in the SPY index fund for a substantial period of time, although such a strategy has underperformed recently, given the rapid upward trajectory of stocks and commodities over the past year. The covered call strategy essentially involves selling near month call options against your stock holdings to collect the option premium you receive from the buyer of the call option. Most investors who are very optimistic in their stock holdings do not want to sacrifice any upside for a deeper margin of safety and income stream that a covered call strategy provides. However, the math behind the covered call strategy shows that significant alpha... Read more