Are you looking for a strategy to generate steady income from your investments?
Or perhaps you’re looking to cushion potential losses in a volatile market?
Either way, selling covered calls might be the answer you’re looking for. This strategy, widely used by seasoned investors, involves writing call options on assets you already own or plan to own. By selling covered calls, you can earn regular income from the premiums paid by the buyers of these options. But like all investment strategies, it’s not without its complexities and risks.
In this article, we’ll delve into the details of selling covered calls, providing you with the knowledge you need to utilize this strategy effectively.
What is the Covered Call strategy
The Covered Calls is an options strategy where an investor writes, or sells, call options on an underlying asset they own or plan to own. This strategy allows the investor to earn income from the premiums paid by the buyer of the call option. If you are new to the options trading space and are looking to make additional “dividend” income from the stocks you own or plan to own, then this strategy can help you do just that.
If you want income from the stocks you own, then no additional money is needed to implement this strategy ( other than commissions and fees, which are nominal). Any new stocks will require an upfront investment of course. But the initial outlay can be less than the market price of the stock you are buying.
Here are some things to keep in mind when trading this strategy. If you don’t feel comfortable doing this yourself, there are companies who can help you plan and implement this income generating strategy.
Free Covered Call Newsletter from Born To SellStep 1: Understanding the Market and Your Options
Before you can start earning from covered calls, it’s essential to understand the dynamics of the options market. This involves studying market trends, understanding how volatility impacts options pricing, and learning about various options strategies.
Step 2: Choosing the Right Stocks
Successful implementation of covered calls requires careful selection of stocks. You should look for stocks that you believe will remain steady or increase slightly in price. High dividend stocks are also often good candidates for covered calls.
Step 3: Selling Covered Calls
Once you’ve chosen the right stocks, the next step is to sell call options against these stocks. The premium received from selling these options can be considered as your income, which can be earned on a regular (e.g., monthly) basis.
Here is an example using AT&T (T). The stock is currently trading for $17.83. The quarterly dividend is $.28 ($114/annual). Owning 100 shares is equal to $1783.00. This is equal to 6.2% annual return.
If you added the covered call strategy, you could sell the 18.5 strike call for the next 45 days and bring in an additional $.17 per share ($17.00 for 100 shares – the size of one option contract). Since there are approximtely 10 – 45 day periods in a year, that’s an additional $170.00. Or you could trade options that expire every 30 days and increase your return even more. Add this to your current $114 and you have handily increased your income to $284 and an annual return of 15%.. That’s not bad for adding a simple straight forward strategy to your tool kit. (these numbers will vary depending on the market action, volatility, etc. Commissions and fees apply.)
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Step 4: Managing Your Options Portfolio
After selling covered calls, it’s crucial to manage your options portfolio effectively. This involves monitoring the market, adjusting your positions as necessary, and keeping track of your profits and losses.
Risks and Rewards of Covered Calls
While covered calls can provide a steady income stream, they are not without risks. If the stock price falls significantly, you could lose money on the stock. However, the premium received from selling the call can offset some of these losses. But, when you think about it, the same can happen for stocks you currently own or the ones you plan to own. Any stock you invest in comes with a certain amount of risk. The beauty of selling coverd calls is you can turn a 50/50 stock bet into a trade with increased probabiliy of success simply by adding the call to the trade.
On the other hand, the potential rewards from selling covered calls include the premium received and potential capital gains if the stock price increases. However, if the stock price increases significantly, your profit may be capped due to the obligation to sell the stock at the strike price.
Covered Calls in Your Individual Retirement
An added bonus for retired investors and individual investors is the ability to trade covered calls in your IRA. Be sure check with your tax advisor to see what this means for your personal investment plan.
The Last Word
Selling covered calls can be a predictable way to earn a steady income from your investments. However, like all investment strategies, it requires understanding, careful planning, and effective management.
If you are not comfortable doing this yourself because your time is limited, there are ways to not have to pass up on this valuable opportunity. Here is a link to a highly rated source that specializes in this income generating strategy..
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