• Selling covered calls also provides a buffer against downside movement and can be viewed as a limited hedge on the underlying stock. If the stock sells off, the premium received on the covered call lessens the impact to the portfolio.
• Writing covered calls is a proven way to reduce overall portfolio volatility.
• Lastly, covered calls retain the potential for some capital appreciation.
Tailoring Covered Call Strategy For Concentrated Holdings
Another use for covered calls is to generate additional cash flow/income on a concentrated stock position, or even utilizing calls to start paring the position back.
Take, for example, an investor who has inherited a sizable holding of one stock from a relative. They may want to keep the securities for reasons ranging from avoiding capital gains tax, to an ongoing belief in the company, or even nostalgia for the family member who gifted them the shares.
Writing covered calls on their concentrated holding can generate additional income and provide a buffer in case the shares sell off. It can also be a way for the investor to get “paid” to start paring back their position, by writing covered calls at the money and increasing both the premium received as well as the likelihood of having shares called away.
Covered Calls In Today’s Market
While the market overall has risen significantly in the past two years, performance has widely varied across sectors.
Since the end of 2016, the S&P 500 Information Technology companies have seen a total return of 68.03 percent, while the worst performing sector (Telecom) saw a total return of -4.57 percent%.