Stock rally, high rates have advisors rethinking covered call strategies

investmentnews.com:

With the stock market a few weeks back into bull market territory, financial advisors might be rethinking their exposure to covered call strategies that tend to gain appeal during flatter markets when interest rates are lower.

But for certain types of clients, covered call strategies that can soup up the income of stock positions they already like might be just the ticket in a market environment that some analysts believe could be running out of steam.

“There are times to use covered call strategies and times when they don’t work well; I am currently using them selectively,” said Scott Bishop, managing director at Presidio Wealth Partners.

Bishop acknowledges the potential downside of selling call options on stocks that can be called away by the option holders, which can trigger brutal capital gains hits if those stocks have lots of built-in gains.

Those are some of the risks associated with a covered call strategy in a bull market, but that doesn’t mean there isn’t also a case for covered calls.

“The best time to use covered call strategies is when you want extra income in sideways or slightly bearish markets,” Bishop said.

Specifically, he likes covered calls for stocks that have some implied volatility. “You can many times get some good income off of the covered calls option writing,” Bishop said. “This strategy works well to get you extra income above and beyond any dividends.”

Covered call strategies started reappearing on advisors’ radar screens a few years ago when interest rates were near zero and the stock market was less robust, making the income from option sales look like a win-win for investors.

The appeal of the strategy was most dramatically illustrated by the JPMorgan Equity Premium Income ETF (JEPI),