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Covered Calls Add Premium but Cap Stock Upside

Article Quant Q&A · Author: gyurisc
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Summary

The document addresses whether an investor who already owns a dividend-paying stock can sell calls to supplement its income. The strategy collects option premium, which can add to the cash received from dividends. It does not establish that the premium will reliably deliver a particular annual yield increase; the question receives only a brief conceptual answer.

The central trade-off is that a call buyer may exercise, requiring the stockholder to sell shares at the option’s strike price. If the share price rises above that level, the investor gives up gains beyond the strike while retaining the premium. The answer does not quantify outcomes or discuss strike selection, expiration, taxes, transaction costs, or early exercise around dividends. Those factors matter when assessing a covered-call position, so the premium should be considered alongside the possibility of selling the shares below their subsequent market value.

Key ideas

  • Selling a call against owned shares generates option premium.
  • The call can be exercised, obligating the investor to sell shares at the strike price.
  • A covered call limits gains above the strike while leaving the investor exposed to stock-price declines.
  • The discussion gives no evidence that premiums will produce a dependable target yield increase.

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Full text
# Is it possible to use options to increase the yield of a dividend paying stock?


# Is it possible to use options to increase the yield of a dividend paying stock?












I was wondering if it is possible to use call options (selling call options) to increase the yield of a dividend-paying stock (that I already own) by 1-2 percent per year?

What are the cons of this strategy?

## Answer by Bob Jansen (score 3)

https://quant.stackexchange.com/a/50829

The advantage is that you get to keep the option premium. The obvious drawback is that your option can be exercised. You’re effectively capping your maximum gains on stock price increase.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.