Several times a week I receive a similar question from curious
investors: "How can I earn more income on the stocks I own in my
My response is typically short and sweet…
Covered calls not only allow me to earn more income from the
I own within my retirement account, they also allow me to bring
in consistent income in my non-retirement accounts.
So I'm sure you are asking what is a call? What is something
that is covered and why would I bother using the strategy?
OK, first question: What is a call? If an investor wants to
buy a stock, they can do so at a lower price by simply buying an
…more specially, buying a call.
Buy a stock = buy a call.
Say you own a stock and someone wants to buy an option to buy
a stock. You have the right to sell that person an option to buy
your stock, or to call your stock away from you at a specific
price within a specific period of time. Because you own the
stock, it's called a covered call. There is one stipulation: you
must own at least 100 shares of a stock to sell a call.
1 call option = 100 shares of stock.
Let's go over a very basic example.
If you bought a stock at $25, your cost basis is $25. Another
investor is willing to pay you $3 for every share you own to call
that stock away from you at $30 a share on and before the option
expires in two months. Essentially, you are getting $33 a share
if the stock gets called away from you because the buyer of the
option paid you $3 a share to do so.
Now why would the buyer of the option want to call the stock
away from me? Simply stated, the stock is trading above $30 a
share. If the stock were only trading at $28 a share, the buyer
of the option is not going to pay $30 for it, so you made the $3
a share and never gave up your stock.
It is an incredible way to make more income on the stocks you
currently own as long as you don't feel bad if that stock goes to
$40, $50 or $60 and someone calls it away from you at $30.
That is why I only use a covered calls strategy on
, dividend-paying stocks like Microsoft (Nasdaq:MSFT), Intel
(Nasdaq: INTC) or General Electric (
). These types of stocks are not volatile. The chance of them
advancing 20% in two months is slim to none.
I'm actually in the process of filming an educational series
on covered calls and selling puts, so stay tuned. I will be sure
to announce when the course is ready to go. Until then, please
feel free to email me if you have any questions on covered
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