Covered call strategies to assist stock portfolio management

Abstract

The main objective of an investor in the stock market is to make profit by buying stocks when he believes their price will rise and selling them when he thinks their price will fall. In this context, an effective instrument to improve returns, but less known to investors in general, is stock options which can be of two types, call, the right to buy a stock, and put, the right to sell it. With this in mind, an investor can perform the covered call strategy where he holds a stock he expects to have a moderate appreciation while he sells call options in order to enhance his returns. The difficulty lies in deciding which configurations to sell the call option for, where the most important parameter is the strike price. The right strike price allows the investor to have more earnings running less risk of being forced to comply with the terms of the call contract. That being said, the purpose of this work is to use historical Brazilian stock market data to investigate different strategies an investor can apply to decide what would be the favorable strike prices for the stocks in his portfolio. To do so, common trading indicators as well as Machine Learning models were employed to simulate different approaches during the year of 2022. By comparing the implemented strategies among themselves and against the standard Buy and Hold approach, we concluded that the most performative strategies were the simplest ones which used basic trading indicators. Therefore, these strategies outperformed the ones based on Machine Learning. Also, although exhibiting acceptable results for the period analyzed, these strategies are intended only for general assistance in portfolio management.