How to Sell Covered Calls to Generate Monthly Income

Selling covered calls is an investing method used to generate monthly passive income from your investments. It is very similar to rental real estate.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• 100 shares of a company's stock
• investment broker
• patience

1. Buy 100 shares of stock - In order to sell a covered call, you must own 100 shares of the underlying stock. If you sell a call without owning these shares, you are exposing yourself to a tremendous amount of risk. Writing covered calls is a useful technique to reduce risk; not increase it.

2. Immediately sell 1 call (on the stock you just bought) - Many online brokerage accounts (like thinkorswim.com) will allow you to buy 100 shares and sell 1 call simultaneously. You will receive the premium income in your trading account as soon as the order is filled. Writing covered calls allows you to generate consistent monthly income.

3. Wait until the expiration date to determine your next step - If the price of the underlying stock rises above the strike price, you will be called out and will receive your investment (100 shares times the strike price) back. If the price of the underlying stock does not go above the strike price, you will not get called out. In this situation, you keep the premium income and still own the underlying stock. Writing covered calls is not a hard technique to learn but is extremely difficult to master.

4. Review Your Options - If you are called out in step 3, find another company and repeat the process. If you are not called out, sell another call on the stock you still own.

Tips & Warnings

• Practice on paper before trying this with real money
• Buy the stock and immediately sell the call
• Try to achieve a 3-5% return on your investment
• Set stop-losses on your stock at 10% below your purchase price. If the stock drops drastically you can lose money very fast.
• Have fun when writing covered calls! If you do not enjoy it, look for other investment strategies.

Resources

• Covered Calls - A Wealth Option
• The Money Machine
• Become Debt Free

[bdcblogs]

on 2/15/2009 I've done this before with success. It's a much better strategy than "hold

[mamerten]

on 1/2/2009 This is a great article. Covered Calls has it's known disadvantages which the author points out very well. But a well disciplined covered call trading strategy can be very profitable and will beat stocks in all but the strongest bull markets. Also, any covered call trader will need some sort of tool to help him make decisions on when to manipulate his positions. A great tool can be downloaded at www.coveredcallcalculator.net

[chasingthebull]

on 12/21/2008 If you do not like what you are doing, you will never learn how to sell covered calls. It this regard, it should be fun; otherwise you should just let a broker handle your portfolio.

While this is a simple example on how to sell covered calls (it isn't meant as a PHD dissertation), it does provide the basics to get started.

[disbsam333]

on 12/19/2008 Epic fail as far as stocks go. It is not "fun," and you shouldn't have fun. Treat it as a business, not a hobby if you intend to actually make money. Also, this is a WAY oversimplified way of making money in options and there are many more factors in which you can lose your money doing so i.e. which price your option should be for, and imlied volatility after the price goes down.