In order to achieve the stated objectives the advisor will endeavor to purchase investments that offer a competitive current yield and simultaneously write covered call options on the asset purchased. Supplementing the stream of dividend income with premiums from the sale of covered calls is a proven strategy in all market environments. Generally, the methodology works best in markets that are not volatile and/or are trending slightly positive. Like all investments there are a variety of ways that the basic theory can be tweaked.
First basic equity purchases are researched to ensure that the Company has sufficient assets to continue to pay its’ dividend through a down economic cycle. Second the industry that the Company participates in must be relatively free of general market vagaries and external risk. Finally, the sale of the covered call is evaluated for its price fairness. Normally, the price of a call closely follows the Black Scholes model. That is the price is a function of the current interest rate, the volatility of the underlying equity, the amount time remaining on the option, etc.
This underlying strategy of combining the flexibility of listed equity options with the benefits of stock ownership has been widely used. Although this strategy may not be suitable for everyone, it can provide a stock-owning investor limited downside stock price protection in return for limited participation on the upside. In addition, the sale of the covered call generates income from the premium received that can supplement any dividend income paid to eligible underlying stockholders.