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Covered Call Strategies: One Fact and Eight Myths

17 Pages Posted: 4 Jun 2014 Last revised: 27 Jan 2017

Roni Israelov

AQR Capital Management, LLC

Lars N Nielsen

AQR Capital Management, LLC

Date Written: August 2, 2014

Abstract

A covered call is a long position in a security and a short position in a call option on that security. Equity index covered calls are an attractive strategy to many investors because they have realized returns not much lower than those of the equity market but with much lower volatility. However, a number of myths about the strategy – from why it works to why an investor should or should not invest – have surfaced, and many of them are erroneously considered “common knowledge.” The authors review the underlying risk and returns of covered call strategies and dispel eight common myths about them.

Keywords: Covered Call, Covered Calls, Call Overwriting, Overwriting, Options, Volatility Risk Premium, Variance Risk Premium, BuyWrite, Buy-Write, PutWrite, Put-Write

JEL Classification: G00, G10, G11, G12, G13

Suggested Citation

Israelov, Roni and Nielsen, Lars N, Covered Call Strategies: One Fact and Eight Myths (August 2, 2014). Financial Analysts Journal, Vol. 70, No. 6, 2014. Available at SSRN: https://ssrn.com/abstract=2444993 or http://dx.doi.org/10.2139/ssrn.2444993

Roni Israelov (Contact Author)

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqrcapital.com

Lars N Nielsen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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