Introduction to Covered Calls

What is a Covered Call Stragegy?

A covered call, also known as a ‘buy-write’, is a widely used investment strategy that involves buying shares (or using shares already owned) together with writing call options over an equivalent number of shares.  The strategy has the objective of generating an income over and above any dividends or capital growth.

What is the difference between covered calls and buy-write strategies?

None.  The two terms are interchangeable.

What are the risks involved?

Contrary to popular belief this strategy is considered relatively low risk.  In fact the writing of an option on a share lowers the risk of owning that share.  Before implementing a covered call strategy the investor must be prepared to sell the shares if the option is exercised however this is only true for options on individual stocks.  It is possible to use index options for covered calls which do not force the share holder to sell if exercised.

Benefits / Advantages for Investors

  • Generate additional income during a period of low anticipated growth
  • Suitable for SMSFs: The strategy can be used for a Self Managed Super Fund in Australia as long as the individual’s SMSF allows for equities and options (most do)
  • Suitable for use with existing share portfolios
  • Low Risk: Lower risk than owning the individual shares

When is it suitable to use Covered Calls?

Covered calls can be used in a variety of market conditions however it is most often implemented when the investor, who may be slightly bullish, feels that the market will not move significantly over the term of the call option.  In general the strategy will underperform in a strong bull market however typically outperforms in sideways or bear markets.

Does Bellmont offer Advice on Covered Calls?

Yes.  We offer advice on individual covered calls and also on a portfolio basis through the use of index options.  See below for more details.

Is it possible to use Covered Calls on a Share Portfolio?

Yes.  If you would like to learn more we have a  free online webinar explaining this strategy.   It can be accessed by clicking the link below: