BlackRock Plugs Covered Calls

Posted: May 21, 2015 | by: Thomas F. McKeon, CFA

In their latest research brief, BlackRock identifies a handful of strategies for "Generating Income in a Low-Rate World."

In their most recent research brief--Generating Income in a Low-Rate World--BlackRock identifies covered calls as strategy number 1 for enhancing portfolio income and returns. Covered calls--also known as buy-writes--sell a call option hedge on an underlying holding. The option sale collects a cash flow or "premium" from the option buyer. It is this premium collected by the strategy which can be construed as "income."

 

From the brief: Having a portion of a portfolio in equity covered calls—or selling away some upside to generate premium in the form of income—can make sense (in addition to owning equities outright) in a market where the upside left in fixed income, even in some of the higher-risk segments of the market, may be limited. The report continues to state that the best Sharpe Ratios from the covered call strategy are derived from one and two month option expirations and at or close to the money striking prices.

 

We agree wholeheartedly and have built our structurALPHA strategies upon those empirically derived analyses, which we discovered when we first began to examine the long-term returns of the CBOE options-based benchmarks. Our insight was to use options as a structural hedge, not a trading tool. This simple insight allows our strategies to maximize the annualized cash flow captured from the methodical, monthly hedge roll cycle and to avoid the self-inflicted wounds of trying to make active trading and hedge-adjustments in the random and unpredictable short-term action of the market.

 

For an expanded discussion about the benefits of a structurally implemented, hedged-strategy, download our paper: The Humble Buy-Write.

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