![]() ![]() ![]() Why Use Dividend Stocks for a Covered Call Portfolio?Ĭonsider what types of stocks tend to be attractive option writing candidates. This article’s next installment discusses how to limit the tax hit on covered call writing. Clearly, the investor would prefer to have income in the form of long-term capital gains rather than taxed as ordinary income. The IRS classifies a trade that starts out with a short sale as short-term regardless of whether the sale is said to have preceded the covering purchase. Also if the option is covered with an offsetting purchase, the difference between its sale price and the cost of covering is classified as a short-term gain or loss regardless of how long the call position was in place. If a call is written and expires worthless, the proceeds from the sale are classified as a short-term gain regardless of how long the position was held. If, however, the stock has been held for less than one year, any gain is short-term and taxed at the investor’s marginal rate on ordinary income. If the stock has been held for more than a year, the gain or loss is classified as long-term and taxed at a relatively attractive rate (20% for most investors). ![]() If a call is written against an existing stock position and ends up being exercised, the gain or loss on the stock represents a capital gain or loss for the investor. Taxes also need to be factored into the call writer’s strategy. Learn more about how writing covered calls can add extra income to a buy-and-hold strategy, but it limits profits on the underlying stock. To pursue this objective effectively requires attention to detail both when setting up the positions and when monitoring them over time. Rather, their objective should be to earn reasonably attractive and steady returns with a limited amount of risk. Significant money would, however, be left on the table, giving the investor a bad case of option writer’s regret.Ĭovered call option writers should not be expecting home run–like returns. In this case, the call writer may still earn a decent return. Alternatively, the price of the optioned stock could increase substantially once the position is established. One might, for example, write a call on a stock whose price then drops by much more than the sum of the proceeds from the call sale and dividend payments. Together, these three income sources can generate rather attractive returns.Ĭovered call writing does incur some risks. Third, the option writer may be able to capture some of the underlying stock’s price appreciation. Second, the covered writer earns any dividends paid on the covered call stock and Such an approach requires more detailed attention than managing a stock-only portfolio.Ĭovered call writing can generate returns in three ways:įirst, the call writer is paid up front to write the calls, thereby reducing the net cost (stock price minus option sale proceeds) of the position While often done on an ad hoc basis, one can assemble and manage a portfolio of covered call option positions as either a part of a larger portfolio or on a stand-alone basis. The importance of pricing, timing and using the right calculationsĬovered call writing is one of several ways options are traded. Why using dividend stocks can be useful for generating income The basics of covered call writing and the associated risks In this article we delve into several points you should be versed in when assembling a covered call portfolio on dividend-paying stocks, such as: However, many income investors may look for additional sources of income, such as writing covered calls against your stock positions. You can think of it as an income cycle where your portfolio is steadily gaining income over time by using the power of compounding. ![]() Many dividend investors choose to reinvest the dividends they accumulate in their portfolio into new shares of stock, which then pay dividends themselves. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |