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Covered Call Strategy

Investment Management Definition

Covered Call Strategy incorporates the ownership of common stock with the sale of a call option providing for the sale of that stock under certain conditions.

Summary

On a stock by stock basis, this strategy trades some of the potential upside for current income and some downside protection. This strategy can be customized to meet the goals and objectives of a specific client and may limit the volatility and risk in a portfolio.

The covered call strategy may be appropriate for clients to generate additional income, receive some level of protection from the stock market and/or achieve growth while managing portfolio volatility. If you are interested in learning more about this strategy and how it might benefit you, please contact a Forteris representative for a more in-depth discussion.

Why use this Strategy?

  • Conservative when managed properly
  • Generates income in portfolio
  • Can enhance overall total return
  • Provides some down side protection
  • Strategy for “Conservation of Capital, Income, Investment Hedge”
  • Complicated to implement, easy to understand (hopefully)

Definitions

Call Option: gives the buyer the right to buy a stock from the seller of the option at a set price up to a specified date.

Premium: Total price of an option contract.

Covered Call: writing (selling) a call option while simultaneously owning an equal number of shares of the underlying stock

Expiration Date: the day on which an option contract becomes void. Generally, this takes place on the Saturday after the 3rd Friday of the month.

Strike (Exercise) Price: the price at which the owner of an option contract may either buy or sell the underlying security. The seller of a call must deliver the underlying security at the strike price.