Covered Call Strategy
Madison is a pioneer in covered call management, offering the strategy in open-end and closed-end mutual funds.
Madison's covered call portfolios own common stocks and sell (write) call options on the majority of these stocks thereby "covering" the stock. A covered call strategy tends to reduce the risk compared to just owning the stock, reduces the volatility of returns and provides protection from declining stock prices. It also provides a steady source of income return. But, because it is a moderately conservative hedging strategy, there is less potential for large returns from stocks.
Call options give the buyer the right to purchase the stock at a certain price (strike price) on a future date. For example, if XYZ Company stock sells at $25 per share, the portfolio manager may sell options (write a call option) that give the buyer the right to buy the stock from the portfolio at a later date at $27.50 per share. This effectively sets a target sales price of the stock and is similar to pre-selling the stock at a higher price.
Madison's Covered Call Investment Team
The writer of a covered call option forgoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline.