What are Covered Calls?

Today’s rock-bottom interest rates and overpriced financial assets have created a low-return investment world that requires proactive yield-enhancement techniques, such as covered calls, to generate the additional investment rate of return needed to retire comfortably.

Selling covered calls generates additional income and lowers the break-even cost basis of stocks already in the portfolio, thus reducing the downside risk of stock ownership at all price points. Selling covered calls also reduces portfolio volatility and, consequently, improves annualized returns. It’s that simple. What’s amazing is that the covered call strategy’s consistently outperform over all time periods.

Covered Calls

Consider the table, “Covered Calls Outperform Over All Time Frames.” Whether you look at periods as short as one year or longer periods up to 20 years, the result is the same: At least one of the covered call indexes outperformed the S&P 500. Moreover, in all time periods except the past three years, both covered-call indexes outperformed.

A new study by Asset Consulting Group (ACG), covering the period between June 1988 and December 2011, underscores the superiority of covered calls over a simple buy-and-hold strategy.

Guardian Plus uses Index ETFs and writes call options to earn premium income without taking on additional risk. The premiums received add to the investor’s bottom line regardless of outcome. It pays for a small downside ‘cushion’ in the event the stock slides downward, while boosting returns on the upside.

Predictably, this benefit comes at a cost. For as long as the short call position is open, the investor forfeits much of the stock’s profit potential. If the stock price rallies above the call’s strike price, the stock is likely to be called away. Since the possibility of assignment is central to this strategy, it makes more sense for investors who view assignment as a positive outcome.

Because covered call writers can select their own exit price (i.e., strike plus premium received), assignment can be seen as a success; after all, the target price was realized. This strategy becomes a convenient tool in equity allocation management.

Writing covered calls is not a sell-and-forget strategy, but one that requires monitoring in the form of active portfolio management. The Portfolio Management Team at Guardian Plus has over 30 years of experience  generating additional income with the use of covered calls.

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Guardian Plus Inc. is a registered investment adviser in the State of Washington. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.