How To Manage A Covered Call Portfolio

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The option income portfolio approach to selling covered call options seek to do the following:

  • To create options portfolios with the objective of earning consistent returns on investment throughout the stock market cycle;
  • To maximize options premium income, dividend income, capital gains potential and downside protection;
  • To increase long-term capital appreciation and income from stock ownership;
  • To minimize risk and provide diversification.

The option income portfolio is a continuous investment strategy.  Stock should be owned and options sold.  Dividend and option premiums can be earned and capital gains increased.  This is a key step in successful investing.

The more active you are, the greater you potential returns will be.  For example, when a sold call’s market value drops to 10-20% of the call premium received when initially sold – the investor should buy to close the call and then write a new call for more time value and/or at a different strike price.  This makes the covered call strategy more continuous and more profitable.

The experienced covered call investor will not panic when the stock price exceeds their call strike price.  They will buy to close the sold call for a loss and sell a new call at a higher strike price.  The loss will be covered by the additional call premium and the potential capital gain of the increased stock price.  The loss from the initial call buyback is a taxable loss for your income tax statement.  The loss is calculated by subtracting the cost of the buyback from the initial call premium received.  The investor should always keep a running log of these buyback transactions that result in a trading loss for income tax purposes. Like any losses over the allowable $3,000 in annual investing losses, they can be carried forward.

As an individual investor, you may not have time to manage a covered call portfolio like described above.  This is OK as you can still create a covered call portfolio for monthly income.  As you gain more investing experience, you can move in the direction of being more active in managing your covered call investing.

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