A covered call can be used to increase the overall return on your portfolio. You need to have at least 1000 shares in a major blue chip company before you can start to write covered calls.
What is a covered call?
A covered call is when you sell someone the right to buy your shares at a set price within a certain time frame. For example, 1 BHP $47 Feb call, would means that the buyer has the right to buy 1000 of your BHP shares at a price of $47 until the option expires in February. The seller will receive a premium for giving up this option. You may receive for example 0.50c per share for sell the covered call so in this case you would receive $500.
The benefit of this strategy is that you are able to earn some extra income on your shares, the catch if the price moves above $47 the option could be exercised and as such your shares are sold.
During time of relatively flat share markets, you can use this strategy to boost the overall income of your portfolio.
Taking the above example, if you were to write 6 covered call over your BHP shares during the financial year, (keep in mind each call generally runs for one month) your could earn a extra $3000 income taking the total yield on the shares from 2% pa to 8% pa.
This strategy is commonly referred to as renting your shares.
Before starting this strategy make sure you speak to your adviser first.
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