It is quite difficult these days for retirees to generate some consistent cash flow. The interest rates are not too attractive, and the yield on the 10-year Treasury bond is substantially below the long-term average. Many retirees today are even purchasing high-yield bonds, bond funds, and dividend-paying stocks in the hope of earning better yield. Unfortunately, the risk/reward ratio in the high-yield bond market is also not good right now–investors may not be getting proper rewards for the risks they are taking. The dividend-giving stocks could prove to be a nice income alternative, but it too depends upon an individual’s risk tolerance.
There is one strategy that many retirees (and investors too) often overlook, which by the way can help generate consistent cash flow. It is the covered calls strategy. Writing (selling) covered calls in Australian market against dividend-paying stocks can generate steady cash flow. However, remember that options trading in Australia is not suitable for all investors. The major drawback of writing covered calls Australia is that investors are limiting their upside potentials of their stock by giving someone the right to call (demand) it from them before the expiration date or at a strike price. Nevertheless, if the consistent cash flow is the main objective, writing covered calls Australia is worth considering.
Volatility is a crucial motif for investors to understand. Two totally different stocks may have same returns, but have entirely different volatility characteristics. The two kinds of volatilities that investors writing covered calls need to understand are implied volatility and historical volatility. The implied volatility is determined by the price of the option contract, and it will change with different expiration dates and strike prices. The historical volatility, also known as statistical volatility, is a measure of how unsteady the stock has been, and it can be calculated over different time-frames.
When investors are considering writing covered calls for income, they should be careful with the stocks that have high option-premiums. Options with high premiums may have a good return potential, but they are expensive and their implied volatility is high. A high implied volatility suggests that the market is expecting a wild price movement; perhaps because of some news, such as a legal case is about to be settled, or an earnings report is due.
No matter how attractive those high premiums may seem to be, retirees should stay away from such option contracts. Instead, they should buy stable, large-cap stocks that pay a decent dividend and have low volatility. The option premiums, of course, may seem mediocre, but at least, the volatility is low, which is important to generate steady cash flow.
Overall, writing covered calls is a good strategy to generate consistent cash flow. Retirees should stick with the large-cap stocks so they can get the best performance.