Top 10 Reasons to Invest in Covered Calls

Traditionally, conservative investors have shied away from the options market believing it to be too risky. But there is one strategy, if followed correctly, that has the potential to produce superior returns; while at the same time protecting investors from market downturns.

The strategy is known as covered call writing. This simply means that investors holding the shares of a company can sell the option to buy those shares at a predetermined price (known as the strike price) by a particular date (the strike date). The restriction here is that the number of options sold cannot exceed the number of shares held. So if I owned 1000 shares of IBM, I could not sell more than 10 call contracts-each contract controlling 100 shares.

This particular strategy is best followed by investors, people who are prepared to hold stocks for the medium to long term, rather than traders. Depending on market conditions, investors who write covered calls will be able to benefit in many different ways. These benefits range from increased returns, to advantageous tax treatment, and to just being able to sleep better at night. What follows is a list of 10 reasons to invest in covered calls.

You get paid up front. This is the best part of writing covered calls. As soon as you write the call contracts, the money will go into your account and be available for you to invest in other quality assets.
During the contract period, you still own the shares and receive all of the benefits of ownership including being able to collect any dividends issued during that time.
Statistically, investors who write covered calls outperform the market by 3% on an annual basis.
In a down market, writing covered calls allows you to protect your profits.
In an up market, writing covered calls give you greater control in timing your exit.
It is possible to create an income stream by continually rolling your position.
Statistically it is unlikely that you’ll ever be called out of your position, so you have no fear of missing out on profits.
Instruments in the options market are generally associated with quality assets in the equity market.
Revenue derived from covered call writing is usually treated as capital gain rather than income.
If the writer of a covered call buys them back and winds up losing money, then up to $3000 of the loss is applied to ordinary income; with remainder being applied to short and long-term capital gains.

The best thing about writing covered calls is that you are usually dealing with quality stocks. So there is a comfort level with respect to possible vicissitudes of the market. This comfort level is increased by the additional revenues provided by sale of the calls. So you are not only in the enviable position of owning quality stocks, but by writing covered calls, you place yourself in a position to be paid to continue to own the shares.