Covered call strategies can help investors manage short-term volatility and may provide better long-term outcomes while seeking to provide attractive monthly income to investors

Equity markets snapped back from the COVID-19 related sell-off in early 2020. In fact, the S&P 500 is up 63% since its low in March 20201, supported by accommodative monetary policy (low interest rates) and fiscal stimulus. This has left many investors asking questions – are stocks too high?... is market volatility here to stay?... how can I diversify my portfolio2 and help meet my income needs?

Regardless of your short-term view on the market, over the long term, covered call strategies may enhance risk-adjusted returns and provide favorable upside/downside capture ratios.

We believe investors seeking to manage their equity market risk should consider equity covered call closed-end fund (“CEF”) strategies as a way of seeking to minimize downside exposure while meeting their income needs.

Why use covered calls?

BlackRock believes that by using an equity covered call strategy, investors can reduce portfolio volatility by capturing option premiums, without having to sacrifice long-term performance. In a covered call strategy, investors sell call options against their equity holdings and receive an upfront “option premium” in exchange for forgoing potential capital appreciation if the underlying stock appreciates above the option strike price. These option premiums generate cash flow which help to mitigate some of the downside risk to owning the stock.

Adapting to market changes with active management

BlackRock equity CEFs employ a unique approach to covered call strategies by primarily writing single stock options versus index options. Each strategy is customized in terms of the amount of overwriting (selling) on the portfolio and the underlying stocks that are covered as well as diversifying both how far in or out of money the option is and the time to maturity of the options. This strategy is designed to maximize upside capture and option premiums while mitigating downside risk.