How to Earn Monthly Income with Covered Calls

This article will teach you how to earn monthly income by selling call options against stock that you currently own in your brokerage account. This income can be used to supplement any earned income or can be used for additional investments.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Brokerage account
• Stock that you own on which options may be written

1. Identify a stock of which you already own at least 100 shares. Ideally, you would own at least 500 shares since the commission on the smaller number of shares will comprise a much greater proportion of your potential profits.

2. Determine if the stock is optionable. This can be decided by typing in the stock symbol at www.cboe.com and seeing if options are available. Alternatively, you could type in the stock symbol on your brokerage's website and click on the options chain tab to see if any options show up.

3. Find a strike place that is close to the current price of the stock. This strike price may be a few dollars above or below the stock price. For example, if the price of the stock is $38, you might look at the $35 strike price and the $40 stock price.

4. Determine if you are bullish or bearish on the stock. If you think the stock might go down between now and option expiration, consider selling the call on the lower strike price. If you think the stock will increase, sell the higher strike price.

5. Once you determine the strike of the call you wish to sell, enter a limit order at about the midway point between the bid and the ask if you want a reasonably high likelihood that the trade will execute.

6. Wait patiently for option expiration. If your stock is called away, you may have to purchase additional stock or another stock to repeat this process on a monthly basis.

Tips & Warnings

• Option contracts are for 100 stock lots so make sure you purchase your stock in 100 share increments.
• Make sure you use a limit order when you sell your call option. Options tend to have large spreads on a percentage basis between the bid and the asking price.
• Don't pick your stock by finding the highest price call premium. This means the stock is volatile and risky. It could fall rapidly, and you could lose a lot of capital.

Resources

• Article I wrote on same subject with more info

[mizzshady]

on 9/17/2009 wow great 5*

[survivoryea]

on 9/5/2009 Good article-been wanting to learn puts & calls - thanks 5*

[axleskat]

on 9/3/2009 very interesting...thanks

[biztone]

on 8/17/2009 I like to trade in futures and options... this was an interesting article. Thank you.

[jbs2212]

on 8/13/2009 Very detailed. I've been messing around with forex trading lately and learning different scalping techniques. Very Good article *5 rec