Getting Started in Covered Calls

Focus: OPTIONS

John Pearce talks about basic covered call strategies, and what new covered calls investors should watch for in this market.

Will investors know that covered calls are a way to increase your returns on your overall portfolio? Are investors still using it? Who is it appropriate for these days? My guest today is John Pearce to talk about that. So, John, let's talk about the covered call strategy. Are more people using it today than ever before?

You know, I think they are. They are becoming more familiar with the strategy, and there is a good reason for that.

Investors are income starved. They are looking for sources of yield and it's a tough environment. Right now, you've got ten-year yields of about 1.5% on Treasuries. Dividend yields are 2%, whereas the 100-year average is more like 4% or 5%. It's very hard to find yield.

So investors have a couple of options. They can move out in the credit and move up to say high-yield bonds, but they are obviously taking on additional credit risk when they do that...but you can get maybe 6% to 7% yield still in that category. Or you can learn about covered calls.

It's a great way to add some incremental income to your portfolio and call it instead of a 2% yield, maybe 7% or 8%, and trade some of the uncertain price appreciation that's associated with stocks for a lot more certain current period income.

Alright, let's talk about who can do this and who is sort of the right candidate and then how you implement this into a portfolio if you're just getting started.