Inflation is a big concern for everyone, myself included. The rising cost of living is especially harmful to those with a low income and those with a fixed income, such as retirees.

Although textbooks will usually give a 60/40 stock-bond split as the standard way to diversify a portfolio, I have always believed that a stock-heavy investment approach is the most beneficial for investors.

Even for conservative investors, I think the stocks of high-quality companies that pay a growing dividend makes more sense than bonds. The key term is growing dividend.

Keep Pace With Inflation

Indeed, If the dividend is growing, it helps to at least partially offset the effects of inflation. On the other hand, most bonds pay a fixed interest. When inflation is rising but you are receiving the same interest payments, your buying power goes down. There are bonds that pay a floating interest rate that will increase with inflation, but the drawback is that they usually come with a lower starting yield.

Even in the case of stocks, however, when inflation is soaring like it is now, most stock dividends aren’t growing fast enough to completely compensate.

At times like these, investors may want to consider ways to generate more income from their investment portfolio.

One way to squeeze out extra investment income is to use an option-trading strategy called a covered call.

Low-Risk Option Strategy

Make no mistake, trading options can be risky. For example, it’s much easier to lose 100% of your investment when you buy an option than when you buy a stock. However, there are many different option-trading strategies, each with their own level of risk, and selling a covered call is considered to be the least risky.

A covered call means that you sell a call against a stock you already own. This means the buyer of the option will, for each option contract he bought, have the right to buy from you 100 shares of the underlying stock at the strike price.

The cash you receive for selling the call is yours no matter what. It’s as though the stock gave you an extra dividend.

Big Cash Flow Boost

Let’s say you own 100 shares of a hypothetical stock XYZ, which is trading for $60 and yields 3%. This means the stock pays $2 per share each year. Suppose you then sell a $65 call that expires in six months for $3. And further suppose that this $65 call expires worthless in six months. At expiration, XYZ is trading for $64 and you are able to sell another six-month XYZ call for $3. How does this change your cash flow?

If you did not sell a call, you would receive $200 a year in XYZ dividend. But because you were able to sell two calls for $3 each time, you collect an additional $600. Your total income from holding XYZ for a year has jumped to $800! What’s more, for as long as the stock isn’t called away, you can keep selling calls. Over time, this can significantly boost your portfolio’s yield. And remember, you will keep collecting the dividend, too.

Minimize Seller’s Regret

Of course, on the flip side, it’s possible that you lose XYZ. If you sell covered calls, you will just have to accept that some times the stock will be called away. Thus, it makes sense to sell calls against stocks that you don’t mind selling at the strike price. In other words, if you would have considered selling XYZ at $65 anyway, then selling a $65 call makes sense.

If XYZ jumped from $60 to $80 at expiration, for example, you would be forced to sell at $65 even though you could have sold the shares on the market for $80. That might be a tough pill to swallow, but because you already own shares of XYZ, you don’t have to come up with cash to buy the stock on the market to deliver to the option buyer.

This contrasts with a naked call (you have no shares of the stock). You would need to come up with $8,000 ($80 x 100) to buy XYZ. If you don’t have enough cash, you would need to borrow cash from the broker (and pay interest) or you have to sell stocks you may not want to sell. Since there’s no limit how high a stock could go, theoretically the maximum potential loss is limitless. This is why selling naked calls is considered to be high risk.

If you own stocks that you intend to hold onto forever, then it wouldn’t make sense to sell calls against them. But for other stocks for which you have a sell target, covered calls are a powerful way of squeezing extra return out of your existing assets to help counter the insidious effects of inflation.

There’s a member of our investment team who’s a wizard at the covered call strategy: Robert Rapier, chief investment strategist of Rapier’s Income Accelerator. Even in the face of rising inflation, Robert’s trades are cash machines. Click here now for details.