Covered Calls the Fund Way
If you've been in the investing world for a while, you've probably heard about -- and dabbled with -- writing covered call options on stocks.
When you write a covered call against a stock you own, you sell the right to purchase your shares for a specified strike price at or before a specified future date. You collect a premium -- the price of the option -- for giving up this right.
And why? The main reason is to generate some current income. Those returns can be juicy -- 2% to 3% per month or more when things work out just right.
My point here isn't to give a full course on covered call writing; there are plenty of resources out there.Instead, here's my issue. Covered call writing on individual stocks can be tricky. Getting good returns means using more volatile stocks, since option premiums are tied to volatility. This is where a lot of investors run into trouble. Moreover, most of us just don't have the time or bandwidth, or don't want to put much risk capital into play this way. That's where covered call funds come in. Covered call writing can be one of those areas where professional help and diversification make a lot of sense. Yet, somewhat to my surprise, only a few funds specialize in covered call strategies, and most toil in relative obscurity to the individual investor. So I want to help show the way. Before going further, here's the main drawing card: Most of these funds pay a steady 8%-10% return, usually as a quarterly dividend. In today's environment of 4.5% money market yields and 5%-6% bond returns, that's not bad. Most covered call funds are so-called closed-end funds, which sell a fixed number of shares that trade on an open market. Click here for the video version of this story from Jennifer Openshaw.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV