Using Covered Calls to Unlock Growth Equity for Income Investors

Income-seeking investors naturally favor stocks with higher dividend yield in the equity portion of their portfolios. Although this helps meet their income objectives, it has some potentially undesirable consequences: a strong style bias and a lack of tactical flexibility in the style dimension. A growth equity covered call strategy is one possible tool for generating income in a multi-asset portfolio that can address these issues. We demonstrate the effectiveness of this type of strategy in generating income while providing diversification against conventional high dividend yield equity. We further show that the strategy’s diversification and income outcomes can be enhanced through systematic stock selection based on option market characteristics rather than growth characteristics alone.