The covered-call options strategy allows an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just bank on income generation from the option premium.
In a flat market condition, the trader would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options. However, the strategy can cap the upside of a potential rally – the trader keeps the premium generated but any gains beyond the strike price will not be realized. Consequently, in an easy-money fueled stock market rally, the buy-write strategy has underperformed the broader equities market. However, with stocks expected to slowdown ahead, a buy-write strategy may be a good way to play a more sideways market.
Additionally, investors can also take a look at the Powershares S&P 500 BuyWrite Portfolio (NYSEArca: PBP), the largest buywrite ETF based off the S&P 500, and the Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), which also employs a covered call strategy on the S&P 500. Year-to-date, PBP rose 2.7% and HSPX dipped 1.3%. PBP has a 2.18% 12-month yield and HSPX shows a 3.8% 12-month yield.
For more information on the covered call strategy, visit our buywrite category.
Max Chen contributed to this article.