Covered Calls for Conservative Investors
Retirement income isn't what it used to be, but as Mike Scanlin explains here, conservative covered calls can pay off far more than bonds in today's market.
Should you be using a covered call strategy? We’re talking about that today with Mike Scanlin. Mike, for equity investors who maybe are not familiar with covered calls, just explain for us why they might want to check this out.
Sure. A covered call is a two-part strategy where you’re long the underlying stock and then you sell a call option against that stock in order to generate some income.
If you have a portfolio of stocks and ETFs today and you’re not writing covered calls against it, you’re sort of leaving money on the table every month. There is no disadvantage to selling out-of-the-money calls against stocks that you already own.
For example, let’s say you had a $50 stock and you were comfortable letting that stock go for $60 maybe in two months, which would be a 20% increase in two months. You could sell a 60 strike call option against that $50 stock today and generate some income today. Do that six times a year and get six extra dividends a year. So it’s a way to generate income on a portfolio stocks and ETFs you have.
Now, one thing that I’ve seen that you’ve written about has been the idea of using covered calls maybe as an alternative to say a money market account or bonds. Talk about that a little bit.