September was a volatile month for stocks and bonds, but options strategies can help investors add modest income to their portfolios. Last month the S&P 500 fell 0.5% amid higher oil prices, rising Treasury yields and concerns about further Federal Reserve rate hikes. In September the 10‑year Treasury yield climbed to levels not seen in 19 years, while the 30‑year yield topped 5.6%, its highest point since 2002. While options are not a substitute for holding income‑producing assets such as bonds and dividend‑paying stocks, they can enhance a diversified portfolio. “We’re hearing that investors feel uneasy about the stock market,” said Ashton Lawrence, certified financial planner and director at Mariner Wealth Advisors in Greenville, South Carolina. “We’re taking your existing portfolio and using options to generate extra cash flow, build positions more deliberately and place guardrails around risk,” he added. Covered calls For those seeking additional income, covered calls can be an effective tool. “The first step many investors take when implementing an income strategy is to use covered calls,” said Joe Mazzola, head trading strategist at Charles Schwab. A call option gives the holder the right to buy shares at a set price by a certain date. In a covered call the investor already owns the underlying stock and sells a call against it. If the stock remains below the strike price at expiration, the option expires worthless and the investor keeps the premium—but must be prepared to sell the shares if the stock reaches the strike price. “You could write covered calls on stocks you already own, particularly those in AI‑related sectors that have risen sharply over the past couple of years,” Mazzola noted. “If the stock has been trading in a range without recent upside, selling out‑of‑the‑money calls can add to your returns.” The downside: if the stock climbs to the strike price and then surges, the investor foregoes that upside potential. Cash‑secured puts For investors who want to earn a little while waiting to buy an ETF or a stock they have on their watch list, a cash‑secured put may be appropriate. “I’m surprised by how much cash sits idle in money‑market accounts,” Lawrence said. “That reflects hesitation about entering the market. Here’s how you can get paid to wait for a lower entry point.” A put option grants the right to sell a stock at a specified price by a set date. With a cash‑secured put the investor sells the put, collects the premium, and must set aside cash to purchase the shares if the stock falls to the strike price. The underlying should be a stock you would be happy to own even in a choppy market. “The key with a cash‑secured put is to make sure you actually want to own the stock at that price,” Mazzola said. “You may be tested at expiration.” The risk is that the stock drops sharply below the strike price, leaving the investor with a loss. Additionally, if the stock rises but never falls below the strike, the premium is kept but the opportunity to acquire the shares is missed. Know what you own In ideal circumstances options can boost portfolio performance, but they carry risk. “There are many ways to generate income, and using options contracts adds a layer of risk,” Lawrence said. “If you’re doing this on your own, be sure you understand what you’re doing and why.” He added, “I view options like fire: you can use it to warm your home, but the same flame can burn it down.”
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