Augmenting Covered Call Returns with Stock Index Options

Anil Sood ()
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Anil Sood: Ernst & Young U.S. LLP

Chapter Chapter 30 in Derivatives Applications in Asset Management, 2025, pp 433-438 from Springer

Abstract: Abstract This chapter describes a strategy to enhance the performance of covered call strategies by integrating stock index options. Using Nvidia, a high-growth stock with high implied volatility, as the central example, the case demonstrates how portfolio managers can generate additional income while mitigating risks associated with short call positions. The analysis introduces the fundamental mechanics of covered calls, where a portfolio manager sells OTM call options on held shares to collect premiums, generating income as long as the stock price remains below the strike price. The case contrasts single-stock options, like Nvidia’s, with index options, emphasizing differences in implied volatility dynamics. The case underlines a real-world example that illustrates the strategy, demonstrating the importance of position sizing to balance cash flow and delta alignment. By maintaining a proportional relationship between Nvidia and S&P 500 option positions based on beta and price correlation, the portfolio manager effectively hedges against potential losses while optimizing risk-adjusted returns. The case concludes by discussing the importance of evaluating correlation, implied volatility, and option premiums when designing adaptive covered call strategies. This case offers a robust framework for managing high-growth equities while enhancing income generation and risk management through innovative hedging techniques.

Keywords: Covered calls; Option premiums; Laddering strategies; Yield optimization; Income targeting (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_30

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DOI: 10.1007/978-3-031-86354-7_30

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