Covered calls are used in mutual fund strategies to earn extra income from stocks already held in the portfolio. In this method, the fund sells call options on the stocks it owns. If the stock price stays below the option’s strike price, the fund keeps the stock and earns premium income, which helps improve returns for investors.

What Is a Covered Call Strategy?

A covered call is a strategy where a fund that owns a stock sells a call option on that same stock. The buyer of the option pays a premium for the right to buy the stock at a fixed price. If the stock doesn’t cross that price, the option expires, and the fund earns income from the premium without selling the stock.

How Do Mutual Funds Use Covered Calls?

Some mutual funds use covered calls to add steady income. They choose stocks they already hold and sell call options on them. If the market is flat or slightly rising, the fund keeps the stock and earns premium income. It’s a way to generate extra return without taking major additional risk.

Why Do Mutual Funds Use Covered Calls?

Mutual funds use covered calls mainly for extra income and to manage risk. If a fund expects the market to be sideways, covered calls help make money from premiums. It also gives some protection if the stock drops slightly, as the premium acts like a cushion. This helps in giving more stable returns to investors.

What Are the Benefits of Covered Call Funds?

Covered call funds offer many benefits:

• Earn extra income from premiums
• Reduce risk in flat or slow-moving markets
• Useful for conservative investors looking for regular returns
• Lower impact from small market drops

These funds are ideal when markets are not very volatile and returns are expected to be moderate.

Are Covered Call Mutual Funds Right for You?

If you're looking for stable income and lower risk, covered call mutual funds can be a good option. These funds work best when you don’t expect high market growth. However, they may not perform well in strong bull markets since the upside is limited. They are better suited for conservative investors or those nearing retirement.