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It’s the end of the year and a great time to take stock of your portfolio.

The past year has been better for some stocks and ETFs than others. Whether you’ve made a killing in one sector or incurred losses in another, chances are your portfolio is a little lopsided. Now is a stellar time to rebalance your investments and ensure your portfolio matches your current risk level and market outlook.

In the process of cleaning up your portfolio, the covered call option strategy may be useful for the stock investor. Here’s why.

Why sell a covered call now?

This strategy involves selling a call option on a stock you own. You hope the stock gets called away, or assigned, so you can sell that stock on or before the expiration date (in this case, before year end). You’re “covered” in that you should already own 100 shares of the underlying stock or ETF for every call option you sell.

Being assigned means you’re obliged to sell your stock at the strike price to the owner of the call option contract. If all goes to plan, you can hit two birds with one stone: Sell an underlying stock position that you want to exit before year end and earn a little extra cash from the covered call sale.

Let’s review two real-world trades that demonstrate covered calls.

Trade example 1: Meta Platforms

Tech stocks like Meta Platforms (META) have performed poorly this year. Some investors will want to exit those positions. Maybe they’re no longer bullish on that stock, or perhaps they need to take a loss that will offset another gain from the year.

For whatever reason, say you want to exit a META position by year end. The current price is around $114 or so – that’s a price decrease of over 60% YTD.

Chart titled A Tech Stock that Underperformed in 2022. Shows that Meta Platforms is Down 66% Year-to-Date. Chart dates from January 2022 to December 2022. The Meta Platforms Stock begins to drop in February 2022 from $350 where it bottoms around $120 in December 2022. Source: Ally Invest, Yahoo Finance.

You could use a covered call option strategy as you attempt to sell those shares, capture the loss before year end and bring in some extra money beyond the proceeds of the sale of the stock. Consider this trade:

You have 100 shares of META stock

Stock traded at 114.40 on 12/6/22

SELL 1 DEC 30TH 115 CALL @ 5.30

Total credit received is 5.30 x 100 or $530 (less commission)

Here we chose a covered call with a strike price of $115 and an expiration date three weeks out – that still puts the expiration date before yearend. If the stock is called away and you’re assigned, you’d earn $530 above and beyond the sale of your stock.

Trade example 2: Exxon Mobil

Energy stocks have done well in 2022 – the inverse of tech stocks. Take Exxon Mobil (XOM), which has seen a YTD price increase from approximately $60 per share to just over $100 per share.

Chart titled An Energy Stock that Outperformed in 2022. Shows Exxon Mobil is Up 70% Year-to-Date. Chart dates from January 2022 to December 2022. The Exxon Mobil stock begins to increase in January from $60 to just over $100 per share in June. It drops in July to $80 a share and rises to just below $100 a share in August. It drops again in October back to $80 a share and increases in December to just above $100 a share. Source: Ally Invest, Yahoo Finance.

Say you’ve owned at least 100 shares of XOM for a while and you want to cash in on gains. Maybe you need to offset some losses for the year. Or maybe you’re just ready to reallocate funds to another stock. Why not try to earn a little extra cash from a covered call sale at the same time?

How it works

Assuming a current price of $104 for XOM, you could sell a covered call at a strike price above the market – around $106 – with an expiration date before the end of the year.

If your stock is called away and you’re assigned, you’d sell your stock – realizing a gain from the sale – and pocket the proceeds from the covered call.

You own 100 shares of XOM stock

Stock traded at 103.49 on 12/6/22

SELL 1 DEC 30TH 104 CALL @ 3.25

Total credit received is 3.25 x 100 or $325 (less commission)

In this example, your goal is to sell your 100 shares of at $104, the strike price and, hopefully, exit your position according to plan. If so, you’d have also earned $325 in extra revenue from the covered call sale to sweeten the deal.

Two caveats for covered calls

First, you must apply and be approved for options trading in your brokerage account before you can sell covered calls. Fortunately, it’s a simple process, and can even apply to trade options in most retirement accounts.

Second, assignment isn’t guaranteed. You might get assigned according to your plan – but you might not. In that case, your covered call option will expire and you might need to sell stock outright to exit the stock position. Therein lies the risk.

The bottom line

Covered calls are a solid strategy, but especially at times when you intend to sell a stock. As we wrap up 2022, the covered call strategy could prove to be a stellar tool for your investing toolbox.

If you’d like to know more about option call strategies, we’ve got you covered with resources like the Options Playbook and this useful options trading glossary.

Headshot of Brian Overby
Brian Overby
Senior Markets Strategist for Ally Invest

As senior markets strategist for Ally Invest, Brian Overby is a widely sought-after resource for his option trading knowledge and market insights. He has contributed to numerous articles for the Wall Street Journal, Reuters, and Bloomberg, and has had frequent appearances on CNBC Fast Money and Fox Business News. A veteran of the financial industry since 1992, Brian continually seeks to improve the understanding of the retail investor. He has given thousands of option trading seminars worldwide, written hundreds of articles on investing, and is the author of the popular trading resource The Options Playbook and its free, acclaimed companion site OptionsPlaybook.com. Prior to Ally, Brian was a senior staff instructor for the Chicago Board Options Exchange (CBOE) and managed the training department for one of the world’s largest market makers, Knight Trading Group.