Increase Profits with Covered Calls

Focus: STRATEGIES

Covered calls provide extra opportunities for investors to see returns on the stocks they already own, say Stefan ten Brink and John Pearce of Van Hulzen Asset Management.

Nancy Zambell: My guests today are Stefan ten Brink and John Pearce, managing directors of Van Hulzen Asset Management. They have a very interesting strategy on writing covered calls, getting dividend income as well as option income for their clients. Gentlemen, why don't you tell me what covered calls are and what they will do for an investor?

Stefan ten Brink: A covered call is an option that you write on the stock to generate income. Let's say you buy 100 shares at $50, and you will sell it at a certain point in time in the future to another investor. The investor pays you a premium for that.

Let's say you buy it at $50. You want to sell it in January 2014, maybe at a 55 strike price. That means you need to sell the underlying security at 55 when it is above 55, and you will receive premium today of let's say $5. Your total profit, when it will be called away, will be $10 on the $50 stock, so you make a nice 20% return.

Nancy Zambell: So $5 from appreciation and $5 from the premium.

Stefan ten Brink: Exactly.

Nancy Zambell: The reason that you are using this covered call strategy, rather than just doing all long positions, is?

Stefan ten Brink: The main reason is that we feel that that the historical relationship of total return is a little bit out of whack.