Covered calls are a great strategy to add to any portfolio, and can offer enhanced yield from stock holdings, in some case, that can be a significant increase.
To trade a covered call we need to own (or buy) 100 shares of a stock and then sell a call option against that stock position.
The goal is to generate income from the stock holding in addition to any dividends. The premium received from selling the call also covers a small decline in the stock price. However, the trade off is that stock gains are limited above the call option strike price.
High volatility stocks have the highest return potential with covered calls, but they also have the highest risk of an adverse price movement. It’s all about finding a strategy that fits the investors risk tolerance.
iShare Bitcoin ETF Trust (IBIT) is up 26.33% in the last three months and is currently showing implied volatility of 40.21%.
Using options, we can generate a significant income from high volatility stocks via a covered call strategy.
IBIT Covered Call Example
Let’s look at two different covered call examples on IBIT stock. The first will use a monthly expiration and the second will use a five-month expiration.
Let’s evaluate the first IBIT covered call example.
Buying 100 shares of IBIT would cost around $6,240. The August 15, 65-strike call option was trading yesterday around $2.73, generating $273 in premium per contract for covered call sellers.
Selling the call option generates an income of 4.6% in 44 days, equalling around 37.9% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 65?
If IBIT closes above 65 on the expiration date, the shares will be called away at 65, leaving the trader with a total profit of $531 (gain on the shares plus the $273 option premium received). That equates to an 8.9% return, which is 73.8% on an annualized basis.
Instead of the August call, let’s look at selling the December 65-strike call instead.
Selling the December 65-strike call option for $7.25 generates an income of 13.1% in 170 days, equalling around 28.2% annualized.
If IBIT closes above 65 on the expiration date, the shares will be called away at 65, leaving the trader with a total profit of $983 (gain on the shares plus the $725 option premium received).
That equates to a 17.8% return, which is 38.3% on an annualized basis.
These figures don’t include any potential dividends received during the course of the trades.
Of course, the risk with the trade is that the IBIT might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 100% Buy with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Implied volatility is at 40.21% compared to a 12-month low of 36.80% and a 12-month high of 64.74%.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
