Have you ever wondered, “Can I earn extra income from my REIT shares without selling them?”
If so, covered call strategies might be what you’re looking for. By using options on REIT stocks, investors can generate additional cash flow—on top of dividends. But like every strategy, it comes with pros and cons. This article walks you through how covered calls and related options strategies work with REITs, in a way that’s simple, practical, and relevant for investors in Arab markets like Saudi Arabia, UAE, Egypt, and beyond.
Introduction: Combining Real Estate and Options
Real estate is traditionally seen as a long-term, stable investment. REITs (Real Estate Investment Trusts) allow everyday investors to access real estate through the stock market, often with the benefit of regular dividend income. But what if you could boost that income further—without selling your REIT shares?
That’s where options come in.
Options are financial contracts that give you the right—but not the obligation—to buy or sell a stock at a certain price within a certain time frame. When used properly, especially with strategies like covered calls, options can add extra income and risk control to your REIT investments.
Let’s start with the most popular and accessible strategy for REIT investors: the covered call.
What Is a Covered Call Strategy?
A covered call is a conservative options strategy used when you already own shares of a stock—in this case, REIT shares—and you want to earn income from them in addition to dividends.
Here’s how it works in simple terms:
You own 100 shares of a REIT. You sell (or “write”) a call option on those shares. This option gives someone else the right to buy your shares at a specific price (called the “strike price”) within a certain period (called the “expiration date”). For selling this right, you receive a premium—cash paid to you upfront.
If the REIT stock stays below the strike price, the option expires worthless, and you keep both the shares and the premium. If the stock rises above the strike price, you may be forced to sell your shares at that price—but you still keep the premium and any gains up to the strike.
In essence, a covered call strategy allows you to “rent out” your REIT shares for additional income.
Example of a Covered Call with REITs
Let’s say you own 100 shares of a REIT trading at 20 USD per share. You expect the price to remain steady or rise slightly over the next month. You sell a one-month call option with a strike price of 21 USD and receive a 0.50 USD premium per share.
- If the REIT stays below 21 USD: the option expires, and you keep the 0.50 USD premium plus any dividends paid. You can repeat the process next month.
- If the REIT goes above 21 USD: the buyer of the option may exercise it, and you sell your shares at 21 USD. You still keep the 0.50 USD premium and earn 1 USD per share in capital gains.
This way, you’re generating income regardless of moderate price movement—though you give up potential upside if the REIT price skyrockets.
Why This Works Well with REITs
REITs are often seen as income-producing assets, not high-growth stocks. Their share prices tend to be more stable and predictable, making them ideal candidates for option strategies like covered calls.
Here’s why:
- High dividend yields mean that even if you get “called away” (forced to sell), you’ve already received income from both dividends and option premiums.
- Low volatility reduces the chance of extreme upward moves, making the covered call outcome more predictable.
- REITs often trade in tight price ranges, giving you multiple chances to sell calls and collect premiums repeatedly.
This steady nature makes REITs particularly suitable for conservative strategies.
Risks of Covered Calls on REITs
Despite being considered one of the safest options strategies, covered calls still carry risks.
1. Capped Upside
When you sell a call option, you agree to a maximum sale price for your shares. If the REIT stock rallies sharply, your profit is capped at the strike price. You may miss out on bigger gains.
This can be frustrating if the market unexpectedly rises, and you’re forced to sell your shares below market value.
2. Early Assignment Risk
Although rare, options can be exercised early, especially near dividend dates. If a buyer wants to collect the dividend, they may choose to exercise the call option before expiration.
This means you could lose your REIT shares before you collect the next dividend.
3. No Protection from Market Decline
Covered calls offer limited downside protection. The premium you collect can help cushion small losses, but if the REIT price drops significantly, you still bear most of the loss.
This strategy doesn’t prevent losses—it only reduces them slightly.
When Should You Use a Covered Call Strategy?
Covered calls work best when:
- You expect the REIT stock to trade sideways or rise slowly, not skyrocket.
- You’re okay with selling the stock if the price goes above the strike.
- You want extra income from an existing REIT position.
- You’re a long-term holder and aren’t trying to time the market.
For example, if you’re holding shares of a stable Saudi REIT like Al Rajhi REIT or SEDCO Capital REIT, and the stock is trading in a range, you can write monthly calls to collect consistent premiums while holding the shares for income.
How to Get Started with Covered Calls on REITs
Here’s a step-by-step plan to begin using this strategy, even if you’re new to options:
Step 1: Choose a REIT You Already Own
Focus on a high-quality, liquid REIT that you’re comfortable holding long-term. Avoid volatile REITs with unpredictable price movements.
Step 2: Check Option Availability
Make sure options are available for the REIT. In many MENA markets, options trading is still limited, but U.S.-listed REITs such as Realty Income (O), Prologis (PLD), or Simon Property Group (SPG) offer many options.
Step 3: Choose a Strike Price
Pick a strike price slightly above the current share price. This gives you a chance to keep the stock if it stays flat while collecting income.
Step 4: Set an Expiration Date
Short-term options (1 month or less) are popular for covered calls. They offer quicker premium collections and more frequent opportunities to adjust the strategy.
Step 5: Sell the Call
Once you’ve chosen your option, you can sell it through your brokerage account. The premium is deposited into your account immediately.
Other Options Strategies for REIT Investors
Covered calls are just one way to use options with REITs. If you want more flexibility, here are a few other strategies worth knowing:
Cash-Secured Puts
If you want to buy a REIT at a lower price, you can sell a put option and receive a premium while waiting. If the stock falls to the strike price, you’ll be required to buy it—but at a discount, and with extra income from the premium.
This is great if you’re happy to own the REIT anyway.
Protective Puts
If you’re worried about a market decline but want to hold onto your REIT shares, buying a put option can act like insurance. It limits your losses below a certain price, though you’ll pay a premium for the protection.
Useful in uncertain or bearish markets.
Collars
This involves selling a call (like a covered call) and buying a put at the same time. It limits both your upside and downside, creating a controlled risk zone.
Collars are used when you want to protect gains while still collecting income.
Special Considerations for Arab Investors
In the Arab region, options trading is still emerging. Exchanges like Tadawul in Saudi Arabia have introduced index options, and more growth is expected in the coming years. However, individual equity options are still not widely available across MENA.
This means most options strategies—especially with REITs—will need to be executed on international platforms that provide access to U.S.-listed REITs and their options chains.
Here are some tips for Arab investors:
- Use international brokers like Interactive Brokers, TD Ameritrade, or Saxo Bank, which offer access to options on U.S. REITs.
- Ensure you understand the tax implications of options income. While capital gains and dividends may be tax-free locally, options income may be treated differently.
- If you’re not familiar with options, start with a simulated account (paper trading) to practice strategies before using real money.
- Always manage risk and understand that options require active monitoring.
Conclusion: Income Enhancement, Not a Miracle
Covered calls and options strategies can be excellent tools for REIT investors who want to enhance income and manage risk. They’re not about timing the market or making fast profits—but about strategically collecting cash from assets you already own.
For REIT investors in the Arab world, this strategy opens new doors—especially as regional markets evolve and more tools become available. Whether you’re holding REITs in Saudi Arabia, looking at Dubai-listed trusts, or investing in U.S. REITs, options can give your income portfolio an extra layer of performance.
Just remember: Options aren’t magic. They require understanding, patience, and proper risk management. Used wisely, they can turn a passive REIT portfolio into an active income-generating machine.
