Updated Wednesday, October 22, 2014 as of 9:52 AM ET

Covered Calls for Additional Retirement Income?

In early August, when Apple shares were trading around $96, listed call options with a $100 strike price and a mid-October expiration date were priced at nearly $2.80. Thus, a client holding 100 shares of Apple stock—a $9,600 value—could have sold (“written,” in options parlance) an option to buy the shares and pocketed a premium of almost $2,800, for an immediate return of about 3%. If that could be repeated for a string of two-month options, the annualized return from selling these so-called covered calls would approach 18%.

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Comments (7)
Fix the typo in the amount of premium collected - it is only 280 dollars, not 2800
Posted by Consumer A | Wednesday, August 20 2014 at 5:09PM ET
Check your math. One to many zeros.
Posted by MARK B | Wednesday, August 20 2014 at 5:26PM ET
First I would like to correct a "typo": when you sell a coll you are obligated to sell the underlying shares NOT TO BUY.
Investing should be a planned enterprise, so a covered calls strategy should be very well planned in all its aspects, especially although not limited to the required minimum return as well as the possible tax implications. If these aspects are taken into consideration and clearly explained to the client there should be no surprises, assuming the right stocks are selected. That is if the selected stock has strong underlying and even better if the company pays a dividend and the calls are written at the correct time interval and strike price it really does not matter if there is a dip in the stock price. The call money goes into the client account and a new call is written. Covered call writing is a grat strategy to increase income IF carefully implemented by a knowledgeable individual.
Posted by BILL D | Wednesday, August 20 2014 at 5:45PM ET
Advising retirees to trade covered calls comes with several caveats. Among these are to have a well-defined sell discipline. The idea that a dip in the stock price doesn't matter is not true. Yes, you can buy back the option and sell the stock. The spread between bid and ask tends to get quite wide when people are desperate to close out positions. You can get clobbered buying back the cal. When shares decline in value, the option premium on the next sale will be lower, reflecting the reduced share price. Before you know it, there's no income anymore.

Best to use this strategy in moderation -- outside the "red zone" 10 years before and after retirement.
Posted by Robert L | Wednesday, August 20 2014 at 5:58PM ET
Robert L. I do not agree with the argument you make: considering today interest rates what else is out there beside equities to provide income and protection from inflation?? Of course the choice of the appropriate companies to select is extremely crucial as is the allocation of funds.; Once these criteria are in place the covered call strategy is the only choice IF properly implemented. Let assume for instance that you recommended IBM to a client as part of a long term equity portfolio would you advise to sell the stock if it drops, no matter how much?? IBM today yields @2.4%; that is not enough to provide a satisfactory income, but if you add appropriately selected covered call the yield can almost double. Further if the stock price drops, I do not see any need to buy the call back and sell the stock; let the call expire worthless, pocket the premium and then write another call. If IBM stock rises very quickly the "in the money" call can always be rolled over at expiration as long s there is some premium in the call you sell compared to the one you buy. If the strategy is correctly implemented your clients will be VERY happy.
Posted by BILL D | Wednesday, August 20 2014 at 8:44PM ET
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