Covered Calls - Enhancing Returns Or Kidding Yourself?

Most income investors are familiar with the strategy of selling calls on stock owned, for additional income. If the call expires worthless, the realized call sale income adds to the dividend income, assuming the stock is a dividend-paying stock, boosting the overall return. If the option is assigned, and the stock must be delivered to the option buyer, the call seller is "covered", by virtue of already owning the shares that must be supplied. The only downside is that the call seller will forgo any gains in excess of the call's strike price.

In conclusion, I do believe that selective covered call selling is a viable strategy, to increase returns on dividend stocks. As long as the option seller has the resources and the temperament to accept the obligations that come with being on the short side of an option contract, and is prepared to accept whatever comes, either by accepting assignment, or by purchasing back the sold option, the strategy can be used successfully to enhance returns.

Source: Seeking Alpha

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