Real Estate Investment Trusts (REITs) have long been favored for their consistent income, exposure to income-producing properties, and inflation-hedging characteristics. Whether in the United States, Europe, or the growing markets of the Middle East and North Africa (MENA), REITs attract investors seeking a blend of cash flow and capital appreciation.
For those holding substantial positions in publicly traded REITs, particularly over the medium to long term, options strategies—especially covered calls—can serve as a tool to generate additional income, manage risk, or enhance total return.
Unlike speculative option strategies that involve leverage and high risk, the covered call is relatively conservative. It allows REIT investors to monetize short-term price stability by collecting premiums on shares they already own. When executed properly, it can complement the dividend income that REITs are known for, creating a layered return profile that appeals to both retail and institutional investors.
This article explores how covered call strategies work when applied to REIT stocks, examines the mechanics, opportunities, and risks, and offers practical insight for investors, including those in the Arab world, who are increasingly turning to exchange-listed real estate investments.
Understanding Covered Calls in the Context of REITs 
The covered call strategy involves two basic steps: holding a long position in a stock and writing (or selling) a call option on that stock. By doing so, the investor receives a premium upfront, which becomes their income—whether or not the option is exercised.
When applied to REIT stocks, this strategy allows the investor to earn both the regular dividend from the REIT and the option premium. However, there is a trade-off: by selling the call, the investor agrees to sell their REIT shares at the strike price if the stock rises above that level during the option period.
This strategy is best suited for investors who are neutral to moderately bullish on a REIT’s near-term price. If the REIT trades sideways or slightly down, the investor retains the shares, collects the dividend, and keeps the option premium. If the REIT appreciates significantly and the call is exercised, the investor sells their position at the agreed-upon strike price and still retains the dividend and the premium received.
Because REITs often exhibit lower price volatility and pay consistent dividends, they are well-suited for covered call strategies. Many sophisticated investors consider this strategy a way to generate additional yield from already income-oriented investments.
The Appeal of Covered Calls on REITs
There are several reasons investors consider selling covered calls against REIT holdings.
First, REITs are known for their high dividend yields, often in the range of 4% to 8% annually. By adding call premiums to this income stream, investors can meaningfully boost their overall yield, particularly in flat or modestly rising markets.
Second, REITs generally exhibit stable price movements, especially those that hold diversified portfolios of residential, industrial, or commercial properties. This price stability limits the likelihood of sudden upward movements, reducing the chance that the call will be exercised. This makes REITs attractive candidates for covered call strategies compared to high-growth stocks that might experience sharp rallies.
Third, in periods of market uncertainty or rising interest rates—when capital appreciation prospects may be limited—REIT holders may seek ways to increase total return without changing the underlying portfolio. Covered calls allow them to do just that, by generating premium income while maintaining exposure to the core REIT holding.
Finally, in some jurisdictions, including Gulf markets, derivatives markets are expanding, and investors increasingly have access to listed options on REITs or REIT exchange-traded funds (ETFs). This access allows for greater flexibility and participation in strategies once limited to advanced markets.
How a Covered Call Works: An Illustration
Imagine an investor who owns 1,000 shares of a publicly traded REIT currently priced at $20 per share. The REIT pays a quarterly dividend of $0.50 per share. The investor expects the stock to trade between $19 and $21 over the next month.
To generate additional income, the investor sells a one-month call option with a strike price of $21 for a premium of $0.40 per share. By doing this, the investor receives $400 in premium income (1,000 shares × $0.40), in addition to the regular dividend they expect to receive.
If, by the option’s expiration date, the REIT’s stock stays below $21, the option expires worthless. The investor keeps the shares, the $400 premium, and the dividend. If the REIT stock rises above $21, the option is exercised, and the investor is required to sell the shares at $21, even if the market price is higher. They still keep the premium and the dividend but forgo any gains beyond the strike price.
In both scenarios, the investor gains income from the premium. The trade-off is the cap on upside potential.
Risks and Considerations
Despite its conservative nature, the covered call strategy is not without risks or limitations.
The most significant is the loss of upside. If the REIT stock rallies well beyond the strike price, the investor must sell at a lower price and miss out on further gains. This opportunity cost is particularly painful in bull markets or if a REIT announces positive news or acquisitions that cause the stock to surge.
Another risk is related to dividend capture. If the call option is exercised just before the dividend date, the investor may lose the right to the dividend. Some option buyers, especially institutions, exercise early to capture the dividend. This is more likely to occur when the dividend is large relative to the remaining time value of the option.
The strategy also carries the risk of price declines. If the REIT stock falls significantly, the investor retains the shares but suffers a paper loss. While the premium provides some cushion, it may not fully offset the decline.
Additionally, the strategy requires monitoring and management. Investors must track expiration dates, strike prices, and dividend schedules. Those with large or multiple positions may need to use options software or engage professionals to help manage the exposure.
Finally, not all REITs have liquid options markets. In emerging markets or smaller exchanges, listed options on REITs may be unavailable or trade with wide bid-ask spreads, reducing the practicality of the strategy.
REIT ETFs and Covered Calls
Investors can also apply covered call strategies to REIT ETFs, which offer diversified exposure to multiple REITs in a single security. ETFs like the Vanguard Real Estate ETF (VNQ) or iShares U.S. Real Estate ETF (IYR) are among the most liquid and have active options markets.
Some asset managers even offer REIT-focused covered call funds that implement the strategy professionally. These funds may use options to enhance income while managing volatility. Investors in regions with limited access to derivatives markets can gain indirect exposure to the strategy through these instruments.
However, it’s important to note that covered call ETFs and funds typically cap potential upside and are best suited for those prioritizing income over growth.
Tax Treatment and Accounting Considerations
Taxation of covered call income can vary significantly depending on jurisdiction. In the United States, option premiums from covered calls are usually taxed as short-term capital gains, regardless of the holding period of the underlying shares. For REITs, this may be paired with dividend income taxed as ordinary income.
In countries across the Arab world, tax policy is evolving. For example, the UAE does not currently impose personal income tax, making such income potentially more attractive to residents. Saudi Arabia and Egypt have introduced capital gains and dividend taxes in recent years, so local investors must understand how both premiums and dividends are treated for reporting purposes.
Moreover, accounting for options strategies requires detailed recordkeeping. Investors must track premiums received, whether options are exercised or expire, and the timing of each trade. This becomes especially important during tax season or financial audits.
Advanced Variations and Strategic Adjustments
While the basic covered call is the most accessible strategy, experienced investors may explore variations to suit different market conditions.
Some adjust strike prices and expiration dates based on volatility and outlook. Selling a higher strike price yields less premium but allows for more price appreciation before a forced sale. Choosing shorter expiries offers more flexibility and faster income but increases the frequency of trading.
Others may use a “buy-write” strategy, which involves buying REIT shares and selling the call simultaneously. This is a way to initiate a covered call position from scratch.
In volatile markets, some traders use collars, which combine a covered call with a protective put. This limits both the upside and downside but provides more security if the REIT stock declines.
Such strategies are more complex and best suited for those with experience, professional support, or access to advanced trading tools.
Islamic Investment and Shariah Compliance
In Muslim-majority regions such as Saudi Arabia, the UAE, and Egypt, many investors consider Shariah compliance when selecting investment strategies. Options trading is a debated topic in Islamic finance, with opinions differing across scholars and jurisdictions.
Some interpretations view options as speculative instruments (gharar), making them impermissible. Others allow certain options strategies, including covered calls, when used for hedging rather than speculation, and when contracts are based on real, underlying assets.
REITs themselves may be structured as Shariah-compliant, especially in the Gulf region. Investors seeking to implement options strategies with REITs should consult both financial advisors and Islamic finance scholars to ensure alignment with personal and regional guidelines.
Conclusion: Covered Calls as a Tool for Income Optimization
Covered call strategies offer REIT investors a powerful method to enhance yield, manage risk, and diversify income sources. Especially in flat or modestly bullish markets, selling call options on REIT stocks can generate consistent premiums that complement the dividend flow, increasing total return potential.
However, the strategy requires careful planning, ongoing management, and an understanding of the trade-offs involved—chiefly the sacrifice of upside in exchange for immediate income. It also demands familiarity with market dynamics, option pricing, and the specific characteristics of the REITs involved.
For investors in Arab markets, the growing sophistication of local capital markets and the introduction of options on regional exchanges make these strategies more accessible than ever before. Yet, like all financial tools, they should be used with purpose, prudence, and a clear understanding of both risks and opportunities.
In the end, covered calls are not a speculative gamble, but a disciplined strategy for those seeking to make the most of their REIT investments—generating income not just from rent collected by real estate, but also from the premiums paid by other market participants.
