Blackstone (BX) stock has pulled back to its 21-day exponential moving average following a strong rally that started in mid-June. Shares of the asset manager have outpaced the S&P 500 over the past year with a 29% rise, compared with the benchmark index's 21% increase.

With the stock rising, Blackstone's annual dividend yield is dropping, but smart investors can increase the dividend yield with the use of a covered-call strategy.

A covered-call strategy is one way to slightly reduce the risk on a long stock position while also generating some option premium. The catch is that upside is limited above the covered-call strike price.

Let's look at how a covered-call trade on Blackstone might take shape.

Making The Covered Call Work

Buying a contract of 100 shares in Blackstone stock would cost around $16,935. A Sept. 19 strike call option at 175 is trading around $4.45 a share, generating $445 in premium per contract. 

Meanwhile, selling the call option generates an income of 2.7% in roughly six weeks, equaling around 22.4% on an annual basis. 

If Blackstone stock closes above 175 on the expiration date, the shares will be called away at 175, leaving the trader with a total profit of $1,010. That's the gain on the shares plus the $445 option premium received.

That equates to a 6.1% return, which is 50.8% on an annualized basis. 

Of course, the risk with the trade is that Blackstone stock might drop, which could wipe out any gains made from selling the call.

No Earnings Risk On Blackstone Stock

Covered calls can be an effective strategy for generating income, managing downside risk and reducing the effective purchase price of a stock. In this case, Blackstone already has reported second-quarter earnings, so this trade should have no earnings risk.

According to IBD Stock Checkup, Blackstone stock ranks No. 8 in its group. Further, Investor's Business Daily gives it a Composite Rating of 92, an Earnings Per Share Rating of 84 and a Relative Strength Rating of 79.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.

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