5 Ways to Profit Using a Covered Call Strategy

For many investors, finding a method that offers consistent returns while managing risk is a primary goal. The covered call strategy represents one such technique. It involves holding a long position in an asset, like a stock, and then selling call options on that same asset. 

This action creates an obligation to sell the stock at a predetermined price if the option is exercised. Let’s explore how this can be beneficial.

Earn a Regular Income

One of the most attractive features of selling covered calls is the ability to generate a steady income stream. When you sell a call option, you receive a payment known as a premium. You get to keep this premium regardless of what the stock price does. 

For investors holding a portfolio of stocks, regularly selling call options against their holdings can create a consistent flow of cash, similar to receiving dividends. This can supplement your overall investment returns.

Help Offset Potential Losses

No investment is without risk, and stock prices can decline. The premium received from selling a covered call acts as a small cushion against potential losses. If the stock’s price falls, the premium you collected can help offset some of that loss. 

For example, if a stock you own drops by $2 per share, but you collected a $1 premium per share from a covered call, your net loss is reduced to $1 per share. This feature can be particularly reassuring during periods of market uncertainty. A solid understanding of what is a covered call strategy is the first step toward using it effectively. 

This knowledge allows you to make informed decisions about when and how to implement it. With platforms like SoFi, investors can access tools and information to help them learn more about these types of options strategies.

Improve Your Portfolio’s Yield

Covered calls can significantly enhance the yield of your investment portfolio. The premiums you collect add to the total return you get from your stocks. 

When you combine the income from these premiums with any dividends you might receive and potential stock price appreciation, the overall yield on your portfolio can increase. This makes your investments work harder for you, generating more income than simply holding the stocks alone would.

Manage Investment Risk

The strategy offers a way to manage risk, especially in volatile markets. When stock prices are fluctuating wildly, selling covered calls provides a predictable return in the form of the premium. This can bring a sense of stability to your portfolio. 

Knowing you have a guaranteed income from the option premium can make it easier to hold onto your stocks through turbulent times without making rash decisions based on short-term market movements.

Capitalize on Sideways Markets

Covered calls perform exceptionally well when the market is moving sideways, meaning stock prices are not making significant moves up or down. In these neutral conditions, it’s unlikely that your call options will be exercised, as the stock price will probably stay below the strike price. 

This allows you to repeatedly collect premiums on your holdings without having to sell your shares, turning a period of market stagnation into a profitable opportunity.