Increase Client Satisfaction, Retention and Referrals With Covered Calls
Standardized put and call options were first introduced in 1973.
Since then option volume has grown at a compound annual growth rate of 25%.
At any given moment there is open interest of 300 million contracts controlling 30 billion shares.
To say that options are popular with investors is an understatement.
To say that they are well understood by the average investor is an overstatement.
The most popular and most conservative of all option-based strategies is the "covered call", where an investor owns stock long and then shorts a call option against those shares.
It is an income-oriented strategy used by many.
In fact, online broker Charles Schwab has stated in the Wall Street Journal that 84% of their option-enabled accounts trade covered calls.
Despite the simplicity and consistent profitability of the trade, many financial advisors do not have a regular program of call writing for their clients.
Reasons given usually include (1) It will confuse the client and I don't want to explain it to them every month, (2) It's too time-consuming, or (3) I can't have their stock called away because of the tax event it would create.
While there is some merit to these arguments, there is also some goodness that comes from writing calls against a client's portfolio.
Most notably: Higher returns and lower volatility (as proven by several academic studies), which in turn lead to happier clients, reduced client defections, and more referrals to new clients.
In addition, because you are writing calls regularly there are more commissions even though you are not churning the underlying stocks in the account.
When you are responsible for investing a person's life savings, especially anyone near or at retirement, you cannot buy high-octane growth stocks for their account.
There is no place for NFLX in a retiree's account.
Instead, for an income-oriented account you should be looking at large cap, dividend paying blue chip stocks that you can write calls against.
For these kinds of stocks, putting a cap on your upside by selling call options is, in reality, not that big of an issue.
There are 396 stocks in the S&P 500 that pay dividends, and the average dividend yield is 2.
54%.
If you ignore the smaller dividends you can construct a blue-chip portfolio that averages 3-4% dividend yield.
Then, layer on a call writing program where you write slightly out of the money calls to generate an additional 6-8%/year in call premium.
That adds up to 9-12% per year in total yield.
If the market is flat for a year you've still produced about a 10% return, while lowering the volatility of their account.
This process has worked well for a stockbroker in Los Angeles who manages over 1500 individual accounts and has been an active writer of call options since the late 1970s.
He credits the call premium income with saving his client's portfolios from stagnation during many of the last 30 years.
Some of his favorite holdings are PFE, IBM, PEP and T.
All solid dividend payers and good candidates for writing slightly out of the money calls with 2-3 months until expiration.
Since then option volume has grown at a compound annual growth rate of 25%.
At any given moment there is open interest of 300 million contracts controlling 30 billion shares.
To say that options are popular with investors is an understatement.
To say that they are well understood by the average investor is an overstatement.
The most popular and most conservative of all option-based strategies is the "covered call", where an investor owns stock long and then shorts a call option against those shares.
It is an income-oriented strategy used by many.
In fact, online broker Charles Schwab has stated in the Wall Street Journal that 84% of their option-enabled accounts trade covered calls.
Despite the simplicity and consistent profitability of the trade, many financial advisors do not have a regular program of call writing for their clients.
Reasons given usually include (1) It will confuse the client and I don't want to explain it to them every month, (2) It's too time-consuming, or (3) I can't have their stock called away because of the tax event it would create.
While there is some merit to these arguments, there is also some goodness that comes from writing calls against a client's portfolio.
Most notably: Higher returns and lower volatility (as proven by several academic studies), which in turn lead to happier clients, reduced client defections, and more referrals to new clients.
In addition, because you are writing calls regularly there are more commissions even though you are not churning the underlying stocks in the account.
When you are responsible for investing a person's life savings, especially anyone near or at retirement, you cannot buy high-octane growth stocks for their account.
There is no place for NFLX in a retiree's account.
Instead, for an income-oriented account you should be looking at large cap, dividend paying blue chip stocks that you can write calls against.
For these kinds of stocks, putting a cap on your upside by selling call options is, in reality, not that big of an issue.
There are 396 stocks in the S&P 500 that pay dividends, and the average dividend yield is 2.
54%.
If you ignore the smaller dividends you can construct a blue-chip portfolio that averages 3-4% dividend yield.
Then, layer on a call writing program where you write slightly out of the money calls to generate an additional 6-8%/year in call premium.
That adds up to 9-12% per year in total yield.
If the market is flat for a year you've still produced about a 10% return, while lowering the volatility of their account.
This process has worked well for a stockbroker in Los Angeles who manages over 1500 individual accounts and has been an active writer of call options since the late 1970s.
He credits the call premium income with saving his client's portfolios from stagnation during many of the last 30 years.
Some of his favorite holdings are PFE, IBM, PEP and T.
All solid dividend payers and good candidates for writing slightly out of the money calls with 2-3 months until expiration.
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