It finally happened. The Dow index broke 20,000 points for the first time in history. It’s never been so high before. If the stock market was a rapper, it would be Snoop Dog. 😀 With valuations being stretched so much it’s important to be very selective about what investments we buy now. One wrong move and we could accidentally buy a stock that is nearing its peak.
Lowering Investment Risk With Covered Calls
So after looking at my options, 😉 I contributed some money into my TFSA earlier this month and purchased 200 units of BMO’s Covered Call Utilities ETF (ZWU.) This is enough to make it DRIP.
A covered call is an options strategy which generates income for investors, even in a bear market. We basically sell a call option on a stock that we already own. In doing so, we receive some money called a premium. 🙂
Related post: How to write a covered call (buy/write options)
Option strategies have slightly different risk considerations than owning a stock directly. For covered calls, we always get to keep the premium. But if the stock goes above the strike price, we have capped the gains we can make. Call options can reduce our risk because if the stock falls, then at least we’re getting paid to wait until it climbs back up.
This is why covered call strategies work best on low volatility stocks that are not expected to move up or down a lot. Essentially we want the stock to remain steady, or grow slowly. But most of the profit should be made from the juicy premiums. 🙂 I do not believe utility and telecom stocks can continue to grow at double digit rates, given how expensive their valuations are.