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Generate extra income
A low interest rate environment often prompts experienced investors to search for alternative forms of yield from their investment strategies. If you are looking for an investment strategy to help generate additional monthly income on top of your dividends with existing or new stock, you can take advantage of a low risk strategy such as a covered call.
What is a covered call?
A covered call is an investment strategy which can help produce a monthly income where the call option is sold against stock an investor already owns. In exchange for selling the call, you will collect a premium from the option buyer. However, the option premium comes with an obligation; if the buyer exercises the option, you will be obligated to deliver the underlying shares (sell the shares) to the buyer of the option at the sold strike price. As you already own the stock, you are ‘covered’ and can deliver the underlying shares, hence the name of the strategy, covered call.
Why write covered calls?
The goal is to generate extra income whilst keeping the underlying stock. Ideally the strategy is implemented when one feels that the stock is likely to move sideways or down and stay below the strike price of the sold call …resulting in the option position expiring worthless. In this instance you keep the option premium – as well as the stock – thereby generating an additional income on your existing holding.
This strategy is particularly good for stocks that pay stable dividends and enjoy a relatively stable stock price such as the major banks, miners and consumer staples.
