Covered calls: less profit with less risk

Dec 10, 2017

Covered Call is a popular strategy that is often considered as a source of additional income for a long-term equity investor. Writing OTM calls is supposed to be a conservative strategy an average investor can pursue to earn a supplementary gain in excess of the underlying assets return.

However, it turns out that the call overwriting against the major equity indices does not add any meaningful profit to the portfolio because almost all the premium collected from the short calls will eventually be lost in the form of not participating in the growth of the underlying security called-out in the cases of ITM expiration.

This research demonstrates that call options on equity indices are priced quite fairly on average (in the contrast to puts) and usually have expected profit/loss close to zero. Moreover, in the secular bull markets, they are mostly underpriced, and Covered Call imposes a drag on the portfolio performance.

Nevertheless, on a risk-adjusted basis, this strategy can be quite attractive, especially for the ITM calls selling. 

The information provided on this Website is for informational purposes only and should not be considered as an investment advice. It is not intended to replace consultation with a qualified financial professional. Investing in options involves risk of potential loss exceeding the whole amount of money invested. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.