Outside of the FAANG bubble, to date in 2018 the U.S. stock market has trended sideways. As you may be aware, that sideways direction has been punctuated by large daily moves in both directions – up and down. Increased market volatility can produce more attractive return opportunities for covered call option traders. However, you don’t have to be an options trader to get a boost from your income stock portfolio based on the covered call strategy.
When you see the financial news media talking about market volatility or the VIX, those metrics are derived from options pricing on the S&P 500. When the market is volatile, option buyers will pay more, and option sellers ask for more to cover the risks of quickly changing share prices. The covered call strategy involves buying shares of a stock and then selling call options backed by the shares. The strategy produces cash income from the call options sales. A cap is put on the upside of potential share price gains, and the options provide a small cushion against a price drop. The covered call strategy is primarily an income producing strategy.
You don’t have to become an options trader to benefit from covered call selling. There are about two dozen closed-end funds that employ the strategy. When you invest in one of these CEFs, you will get exposure to the stock portfolio of the fund, plus an attractive dividend yield from the call selling employed by the fund managers. Here are three funds to consider.
Columbia Seligman Premium Technology Growth Fund (NYSE: STK) seeks capital appreciation through investments in a portfolio of technology related equity securities and current income by employing an option writing strategy.
The fund’s investment program will consist primarily of investing in a portfolio of equity securities of technology and technology-related companies as well as writing call options on the NASDAQ 100 Index or its exchange-traded (ETF) fund equivalent on a month-to-month basis.