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Why Smart Investors Use Covered Calls to Profit

Why Smart Investors Use Covered Calls to Profit

Posted On February 4, 2020 1:47 pm
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Recent market volatility has both put traders on edge and pumped up the volatility in options.

Those two usually go hand in hand and they create a great opportunity for longer term investors with a cooler demeanor to capitalize on the current dislocation.

One of the best, and most popular approaches, especially among investors that don’t consider themselves ‘option traders,’ is the covered call strategy.

The other day  I wrote how people are piling into funds that employ option premium selling strategies, particularly covered calls or buy-writes.

I figure it’s a good time to drill down into exactly what these strategies entail.

It’s a way for owners, especially for buy and hold types, to generate income from the stocks they own while also providing a bit of a hedge for their portfolio.

When a trader writes a covered call, usually they are looking to sell theta decay, which is a component of premium.  Selling premium can mean many things, but we mean selling extrinsic value.

Extrinsic value is…

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About author

Steve Smith
Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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