Our specialized method involves constructing a diversified portfolio of high-quality common stocks (or using a client’s current stocks), then writing covered call options on them.

You may have large holdings in one or just a few stocks that you acquired through an employer-sponsored compensation plan, as an inheritance, or from accumulation over many years. If you’re like many of our clients, you don’t want to sell these shares due to the attendant tax liability, an emotional attachment or an expectation that these stocks will appreciate in the future.

However, if these stocks pay little or no dividend, or they aren’t regularly appreciating, they have become essentially unproductive assets. Writing covered call options to generate premium income converts these “atrophied assets” into lucrative cash flow vehicles. To reduce the chance of having your shares called away due to option exercise, we write the options using staggered strike prices and expiration dates. This creates a balance between generating a meaningful income stream and reducing the risk of having to sell low-basis shares.

We also take other preventive measures to keep your shares from being called away. For example, options that are at risk of being exercised are bought back, thereby removing the obligation to deliver the underlying position. New options are then written at a higher strike price or more distant expiration date to continue producing option premium income.

Portfolio construction begins by screening for companies whose current dividend yields are significantly higher than the market average. Stocks that pay no dividend are not considered, nor are those whose dividend yields are so high that they suggest underlying problems. This results in a dearth of technology stocks and companies whose ability to continue paying dividends may be questionable.

As the underlying candidates for purchase are identified, their associated options are analyzed. If the corresponding options do not offer sufficient option premiums, alternative underlying stocks are researched until a desirable stock/option combination is identified. Options are typically written for a term of one to two months. This affords the opportunity of collecting multiple option premiums during the course of a year. It also avoids being “locked-in” to longer-term options should market or company-specific conditions suddenly change.

The underlying stock positions are thoroughly evaluated at each option expiration date. They are considered as possible sell candidates if their fundamentals deteriorate, they become overvalued, or their associated options fail to offer adequate premiums.

Stock selection begins by researching large capitalization stocks in the 10 broad sectors that make up the S&P 500. To assure broad diversification, portfolios are allocated among the different sectors similar to sector weightings in the S&P 500. The individual stocks within each sector are evaluated based on underlying fundamentals and relative-valuation criteria. The result is a portfolio of companies that are financially sound and whose shares are reasonably priced.

As the underlying candidates for purchase are identified, their associated options are analyzed. If the corresponding options do not offer sufficient option premiums, alternative underlying stocks are researched until a desirable stock/option combination is identified.

Options are typically written for a term of one to two months. This affords the opportunity of collecting multiple option premiums during the course of a year. It also avoids being “locked-in” to longer-term options should the market or company-specific conditions suddenly change.

The underlying stock positions are thoroughly evaluated at each option expiration date. They are considered as possible sell candidates if their fundamentals deteriorate, they become overvalued, or their associated options fail to offer adequate premiums.