The Covered Call Strategy invests in conservatively financed, large capitalization stocks at reasonable prices and writes covered calls against each position. The Strategy will have calls written on 50% to 100% of stock holdings.
Long-term trends in Return on Invested Capital and Free Cash Flow are used to assess a company’s competitive advantage. Price-to-Earnings Ratios and Historical Dividend Growth are used to identify companies with sustainable business models and help the manager build a portfolio of stocks selling below their intrinsic value.
The Strategy will invest in stocks that meet our strict criteria for quality and valuation and will only buy stocks which have liquid calls and pay a dividend. The stock selection process is of utmost importance for the Covered Call Strategy. The Strategy will own 25-35 stocks, each thoroughly vetted for downside risk.
Investment Strategy Advantages
The key advantages of the Strategy are increased income and reduced volatility. The writing of covered calls adds income in the short term. An added benefit of the writing of covered calls is the reduced volatility as a result of the partial hedge it provides. The Strategy can focus on investments for the long term while also taking a shorter term view on a stock through the sale of the appropriate call option.
- High Dividend Yield
- High Free Cash Flow Yield
- High Income from Calls
- Low Price to Earnings Ratio
Investment Strategy Risks
Market Decline – Risk associated with a large decline in the stock market. Since covered calls are not a true hedge, a large decline in the market will not be fully protected with this strategy.
Market Increase – Risk associated with a large increase in the stock market. Since covered calls are written for a specific maturity with a strike price for each stock, the strategy will not experience the same increase in value if there is a large increase in the market in a short period of time.
Concentration – Risk associated with holding a concentrated list of stocks, versus an index which may hold hundreds.
Quarterly Fact Sheet
Covered Call Strategy