A covered call is a combination of owning shares of a stock and selling (or writing) call options against those shares.
A call option is a contract that gives the buyer of the option the right (but not the obligation) to buy 100 shares of the underlying stock at the strike price any time before the expiration date.
If the seller of a call option owns the underlying shares, the option is considered "covered" due to the ability to deliver the shares without purchasing them in the open market at unknown - and possibly higher future prices.
3 Possible Outcomes When Selling a Covered Call
Outcome #1 - If the price of the stock is less than the strike price at expiration, then the call expires worthless, and you will keep the underlying stock in addition to the premium received for selling the call option.
Outcome #2 - If the price of the stock is above the strike price at expiration, then the call option can be assigned and you will have to deliver 100 shares of the stock at the agreed upon “strike” price.
Outcome #3 - If the price of the stock is above the strike price and you want to keep the stock, then you can buy back the option and sell another call often adding additional premium. Losses on option buybacks can be used versus year to date taxable gains.
This strategy is designed to maximize risk-adjusted returns by combining the long-term appreciation potential of stocks with lower volatility and income generation through covered call option writing. The foundation of this approach is a core portfolio of carefully selected large-cap equities. We sell covered call options against these underlying stocks in an effort to generate additional income. Our emphasis is on fundamental quality, strong profitability, low debt levels and proven management. While this strategy reduces upside potential in very strong markets, it brings in an immediate cash return and generally reduces portfolio volatility.
What do we look for in a stock?
Investment Process
When do we sell a stock?
Reducing/Selling Position
Summary of Portfolio Construction
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Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Investors should understand the particular risks associated with options prior to engaging in any covered call strategy. These risks are more fully described in the Options Clearing Corporation Publication, “Characteristics and Risks of Standardized Option Trading” which can be found at: http://www.optionsclearing.com/components/docs/riskstoc.pdf. Hard copies may be ordered by calling 1-888-678-4667 or writing OCC, 1 North Wacker Drive, Suite 500 Chicago, Il 60606. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Connors Investor Services, Inc.), or any non-investment related content, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Connors is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from Connors.
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Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the “ODD”). The ODD and supporting documentation for any claims, comparisons, recommendations, statistics or other technical data in these materials are available by calling 1-888-OPTIONS, or contacting Cboe at www.Cboe.com/contact. Futures trading is not suitable for all investors, and involves the risk of loss. The risk of loss in futures can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.
Writing covered calls limits the upside potential of the underlying security. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment and general market conditions. Options that expire unexercised have no value. By writing (selling) a call option and receiving a premium, the writer becomes obligated during the term of the option to deliver securities underlying the option at the exercise price if the option is exercised or, if an index option, a cash settlement would apply.
The information in these materials is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in these materials. No statement within this material should be construed as a recommendation to buy or sell a security or to provide investment advice.