Covered call strategies have been around for many years and are particularly well known in the US market. As yields on financial assets have diminished, the popularity of these strategies has surged, by as much as 25 per cent per annum over the past 10 years according to some estimates, and some $45bn is currently invested. The approach is less accepted in the UK, but a handful of equity-focused funds are managed in this way. A covered call position involves taking a long equity position and writing a call option on the same security. In essence, some of the future potential capital growth is sold in exchange for an option premium. During bull markets, share prices may go through the pre-set strike price of the options, and the positions can be called away; such strategies will typically lag the market's advance. In down markets, the strategies are exposed to declines in share prices, but the revenues generated by call writing mitigate the drawdown.
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