Covered Call Writing
To earn additional income while at the same time receiving benefits of stock ownership, Income Works applies the strategy of covered call writing to the investment portfolio. This is an strategy that uses equity in an otherwise low-yielding fixed income market. The mechanics of this strategy involve an option contract whereby there is a call buyer and a call seller. The call seller receives additional income in the form of a premium, which is delivered as cash up front, on a stock held in the portfolio.
The call buyer, in exchange for paying the premium up front, has the right to purchase the underlying stock in the portfolio at a future predetermined price (strike price) and date (expiration date).
The Chicago Board Options Exchange (CBOE) speaks to this strategy:
Income on a Continual Basis
A call seller benefits from the premium in any of these three ways:
If the stock is above the strike price and is called away, the call seller benefits by the full amount of the premium plus any appreciation on the stock up to the strike price.
If the stock stays roughly in the same price area when the call was purchased, the call seller benefits from the full amount of the premium received.
If the stock goes down, the call seller's break-even point is reduced by the amount of premium received.
Although the strategy can limit the stock's upside potential, it can also reduce downside risk. In addition, the call seller is entitled to any dividends paid during that period.
The strategy does not guarantee against loss, may not meet an investor's objectives, and participating in options involves risk and is not necessarily suitable for all investors.
**Copies of the Option Disclsoure Document and supporting documentation about option trading are available from Richard Baker of Income Works, LLC.