I often refer to covered calls as the third leg of a balanced, income-focused investment approach. (Three legs because it takes at least that many to make any chair or table stable and functional—the others are cash flow with high-yield stocks like in the Dividend Hunter and stocks consistently growing dividends like those in my Monthly Dividend Multiplier service.) My years of investing and writing about the markets led me to realize that cash returns should be the basis of a sustainable investment program.
A few months ago, I highlighted for my subscribers the results of a recent study on buy-write covered call selling, put out by Goldman Sachs and reported in a Bloomberg article. Goldman did extensive research into the return potential buying stock and out-of-the-money calls against the purchased shares. This quote best sums up the findings:
Since 2003, every buy-write strategy we tested outperformed the total return of S&P 500 on a risk-adjusted basis, regardless of strike selection…
This high-level validation of the power and validity of employing covered call strategies reinforces what our covered call team already knew. Using covered calls is a great way to generate above-average returns in your investment portfolio.
Here are some of the other benefits using covered calls brings to the table:
Real Cashflow Returns: Those who know me know that I like investment returns that come in the form of cash into my brokerage account. It is a topic I cover over and over again. The selling option of premium is like earning dividends. Even better, you get the cash upfront, and it’s yours to keep. That option premium income gives a base return to every covered call or cash-secured put trade.
Potential for Added Returns: In addition to the cash received from selling options contracts and possibly dividends earned, there is potential for capital gains. We recommend selling call options with strike prices higher than the price paid for the shares of stock. If a sold option is exercised, there is a built-in capital gain as the shares are called away at a price higher than we paid.
Minimal Time Commitment: When they hear about options trading, many people think about sitting in front of their computers all day every day, managing their trade positions. Following our Weekly Income Accelerator trade recommendations does not jibe with that perception. We send out four to five trades per month. You can set one up in your brokerage account, and get it submitted and filled in a few minutes. Once you have made a recommended trade, you typically don’t need to think about it until the sold options get within a few of days of expiration, 30 to 60 days after you placed the trade. You can do the work required to follow our recommendations in about 30 minutes a week, which works out to one to two hours per month—tops!
Generate Attractive Returns in All Market Conditions: While I put this at the end of the list, it’s the most crucial factor. You commit to any investment or trading system with the intention of making money. However, many strategies depend on appreciating stock values. The power of the covered call options strategy is that it can generate attractive returns in all stock market conditions. Covered calls are the most conservative options trading strategy, but the strategy is still a consistent money maker. It won’t generate homeruns, but will produce singles when the stock market is struggling, and doubles when stock prices rise.
Our 2018 results clearly illustrated the power of our strategies. That’s when Jay and I joined forces to offer covered call trade ideas. For the whole year, every major investment asset class lost money… except for cash. Yet in a year when so much of the market finished in the red, my partner Jay Soloff and I recommended trades for a very profitable year. My trades produced an average 27% annualized return, and Jay’s trades averaged 43% annualized. We hit a lot of doubles in 2018.
2020 was a different kind of year, with some market sectors crashing and staying down, and others setting record highs. For the year, volatility in the market was tremendous, but our covered call trades remain very positive, with all the recommended trades producing an average annualized return of almost 20%.
Here at Investors Alley, we use a team approach to covered call trading. Our different backgrounds in the investing and markets universe prompt us to look in different areas for our covered call or cash-secured put trades. I think this gives us a great advantage. We also review each other’s trade recommendations to ensure what one thinks looks good is reviewed by the other. Also, we love to help investors new to options figure out how to set up and place trades. Jay and I both promptly answer emails from our subscribers, and we take the extra steps to make sure you get the returns we forecast with our recommendations. Helping you all make money is very rewarding for both of us.
If your investing plans include finding some new investment strategies that would protect you against another year like 2020, consider learning about covered call trading, and find a good source of trade recommendations. Jay recently finished up a primer on covered call trades and is making available free to my readers. You can get a copy here.