Investors can generate portfolio income and benefit from price appreciation in their stock holdings with an options strategy — provided they do it right. An investor who is already holding a certain stock can sell a call option against it — that is, the right to buy an asset at a specified or "strike" price by a certain date — to another investor. This move, known as covered call overwriting, provides portfolio income in the form of call premiums.
In addition, if the strike price is sufficiently higher than the current price, the initial investor can benefit from the appreciation in the meantime. The investor does, however, give up any upside above the stock price because at that point the stock will be called away. "The strategy is best suited for names the call seller has a neutral short-term view on, as a call sells the right to upside participation beyond the call strike for a fee," wrote Arjun Goyal, equity-linked analyst at Bank of America, in a report earlier this month.
There are risks to the move. For instance, if the underlying stock falls short of the strike price, the premium can provide some cushion on the downside. However, if your losses exceed the income from the premiums, then you'll begin participating in the decline.
Goyal's team came up with several call overwriting candidates from the Russell 1000 , assuming an options expiration date of Aug. 16 for each. The firm thinks these names could see upside of at least 6% by that date and command attractive.
