A Wealth of Common Sense: Investors Love Cash Flow
Investors have several alternatives to simply buying and holding a stock or bond. One popular strategy is to use options to generate income. The most popular strategy is selling call options against a stock position.
Known as “writing” covered calls, the strategy can increase the income generated from a portfolio. The downside? The returns on a stock become capped. If shares rise above the strike price of the call option, shares can get called away.
This income strategy has grown over the past few years, even as interest rates have jumped higher. Following the poor performance of stocks and bonds in 2022, covered calls offer a way to beat poor returns. Over $100 billion in assets are now in funds that employ this strategy.
For investors, covered call options can add income to a stock that might not pay one. Or it could result in two to three times the income offered by a dividend-paying stock.
In a bull market, this strategy can underperform. But it prevents investors from facing big losses. And it can help ensure that investors take profits on a stock that’s rallying.
Investors may want to incorporate using options for income in their own portfolio to boost returns and lower risk.