Writing Covered Calls On Dividend Stocks

Writing calls on stocks owned in a portfolio – a tactic known as “covered call writing” – is a viable strategy that can be effectively used to boost returns on a portfolio. Writing covered calls on stocks that pay above-average dividends is a subset of this strategy. Opinion seems to be divided on the wisdom of writing calls on stocks with high-dividend yields. Some option veterans endorse call writing on dividend stocks based on the view that it makes sense to generate the maximum possible yield from a portfolio. Others contend that the risk of the stock being "called away" is not worth the measly premiums that may be available from writing calls on a stock with a high-dividend yield.

Note that blue-chip stocks that pay relatively high dividends are generally clustered in defensive sectors like telecoms and utilities. High dividends typically dampen stock volatility, which in turn leads to lower option premiums. In addition, since a stock generally declines by the dividend amount when it goes ex-dividend, this has the effect of lowering call premiums and increasing put premiums. The lower premium received from writing calls on high-dividend stocks is offset by the fact that there is a reduced risk of them being called away (because they are less volatile).

Source: Investopedia

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