Assembling a Covered Call Portfolio on Dividend-Paying Stocks
by Ben Branch
Covered call writing is one of several ways options are traded.
While often done on an ad hoc basis, one can assemble and manage a portfolio of covered call option positions as either a part of a larger portfolio or on a stand-alone basis. Such an approach does require more detailed attention than managing a stock-only portfolio. Nonetheless, systematically managing a portfolio of covered calls has much for me to recommend it.
Covered writing can generate returns in three ways:
- First, the call writer is paid up front to write the calls, thereby reducing the net cost (stock price – option sale proceeds) of the position;
- Second, the covered writer earns any dividends paid on the call-covered stock; and
- Third, the option writer may be able to capture some of the underlying stock’s price appreciation.
- Taken together, these three income sources can generate rather attractive returns.
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