Video # 4 in our new 7-part series, featuring Roger Michalski and Bryan Perry.
VIDEO # 4 TRANSCRIPT
Covered Call Writing: A Favorable Strategy for Your Retirement Account
ROGER: Hi, this is Roger Michalski, publisher at Eagle Financial Publications. We are now in video 4 of our covered calls series with Bryan Perry, the editor of the Cash Machine newsletter. So Bryan, one of the things that I think people want to know about is — what type of account do you need to run this covered call strategy?
BRYAN: Well, any account will work, Roger. Some are more favorable than others… but you can basically deploy a covered call strategy through cash accounts, margin accounts, retirement accounts, and even some 529 college accounts will allow for that kind of management tool as well.
It is considered to be such a reduced risk type of management tool, that it is about the only options strategy that’s what is called a blanket of what they call “level one approval” for most accounts. So, you can have almost no experience at all investing in this tool to be approved for covered call writing. So that just kind of gives you an idea of how much the brokerage firms and the compliance departments of these places think of covered calls, simply because you’re not taking on risk — you are selling risk, and really that is the larger mechanic behind it all.
Retirement accounts make more sense, simply because the income you’re generating from covered calls is taxed at ordinary income rates. Unlike qualified dividends, which are 20% and then holding long-term capital gains, which are taxed at 20% also… in a covered call strategy, there’s a risk of having your stock called away from you if it trades higher than where you sold that right to have it and bring in that covered call premium.
So for investors who have a very low-cost basis that they’ve held stocks for years and years and years… may want to consider not writing covered calls against those positions where they would incur a very large capital gain. But at the same time in retirement accounts, it’s pretty much a very favorable strategy from the standpoint of the only tax you incur is when you take out money out of the IRA, and it really doesn’t matter how that money is generated.
Whether it’s short-term, long-term, qualified income or just from option income related. So ideally you want to have an active covered call program in your retirement account… but it doesn’t mean you can’t also do this very effectively in a cash account as well. But simply know that you’ve got to watch your cost basis if you have inherited stock that has a very low (cost) basis.
ROGER: Alright so, you can do it on any kind of account… but it’s sometimes better to do it in a retirement account to keep it away from the government then, basically.
BRYAN: Exactly, that’s always a good idea. I’m with you on that.
ROGER: So thank you, Bryan, for that and on our next video I am going to ask you to actually walk us through an example (selling covered calls) on a white board. So can you do that for the next video?
BRYAN: I would love to.
ROGER: Okay great, well, I look forward to video number 5 where Bryan will walk you through a covered call writing case study.