Dividends4Life: Do Covered Calls Improve Returns?

Do Covered Calls Improve Returns?

Posted by D4L | Saturday, March 05, 2011 | | 0 comments »

Although covered call writing is relatively common by income investors looking to boost returns, there are questions as to whether it actually improves long-term portfolio results. The premiums are tempting: the question is, do they compensate for the lost profits on share appreciation? Is the moderate amount of downside protection afforded by the premium received worthwhile?

Based on information developed, I question the sale of covered calls on an ongoing and indiscriminate basis. For investors who have the time and resources to develop an opinion on each individual case, a workmanlike approach applied to a conservative selection of stocks would probably add 2 or 3% to expected performance vs. the S&P over a long period of time. Investors who believe future market volatility will be relatively muted will reap good rewards selling covered calls, if their take on the market is correct.

Source: Seeking Alpha

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