Personal Investor: Generate income by writing covered calls
Central banks are leaning toward higher interest rates but don’t hold your breath waiting for bond yields to rise. The nearly-decade-long income drought has many investors looking for alternatives. That alternative could be found in the options market – specifically writing covered calls.
Covered call writing is ideal for long-term investors who own stocks that they expect to rise over time, but trade flat in the short term. It’s like renting out your stock to a covered call buyer, who pays a premium. You collect the premium, plus any dividends the stock generates, plus gains in the stock… to a point.
That point is called a strike price. If the stock hits the strike price within the predetermined term of the contract, you must sell.
In other words, a call option gives the buyer the right - but not the obligation - to buy the stock at a predetermined price (the strike price) on or before a set expiration date.The tricky part is figuring out if the premium is worth the risk of being forced to sell a stock that you like. The options market sets the price. Whether or not it’s a bargain is something you should discuss with your financial advisor.