Are you a shareholder with at least 100 shares of stock? If so, and you haven’t been doing a covered call strategy against them, you’re potentially missing out on a golden opportunity to earn extra income.
There are traders out there who are willing to pay you today for the right to acquire your stock at a higher price in the future. This strategy, known as selling covered calls, can be highly profitable and offers a win-win situation for both parties involved.
In this article, we will be discussing the covered call strategy and exploring how they can help you boost your bank account.
If you are new to options trading then I would encourage you to go through the basics of options trading here. This would give you a complete idea of how to start trading options.
To execute a covered call strategy, you must possess a minimum of 100 shares of a particular stock. This requirement ensures that you have collateral to support the trade. Selling calls without owning the underlying shares exposes you to unlimited risk, which I would never advise for.
To participate in the covered call strategy, you need to have the stock in your possession before you start selling options against them. Brokers also typically disallow naked call selling to protect investors from potentially catastrophic losses.
So the first part of this strategy is to have 100 shares which give you the power to run a successful risk-free covered call strategy.
Low Risk and Max Profit
The primary benefit of selling covered calls is the ability to generate income while limiting your risk exposure. By selling a call option against your shares, you are protected from adverse movements in the stock price.
Even if the stock price skyrockets, you won’t be obligated to repay the buyer of the call because you have the shares to fulfill the transaction. This is why covered calls derive their name from the fact that the calls are covered by the underlying shares.
Covered Call Strategy For Income
Warren Buffett, one of the world’s most successful investors, also generates consistent income by using a covered call strategy. This strategy aligns perfectly with his philosophy of collecting income from his investments. Selling puts is another income-generating strategy endorsed by Buffett.
Selling covered calls is a powerful tool for increasing your overall wealth. You will be surprised to know that many investors still fail to take advantage of this strategy. By mastering covered call options, you can secure a market return or even achieve an above-average return.
Whether you prefer weekly or monthly income, selling covered calls provides a steady stream of cash flow. It’s a strategy that can be pursued for a lifetime, allowing you to enjoy the benefits of increased income and financial security.
Passive Income Using Covered Call Strategy
One of the most important aspects of selling covered calls is the opportunity to earn passive income effortlessly.
By leveraging your existing stocks, you can transform them into income-generating assets. Similar to dividends, the premiums you collect from selling call options provide you with regular income. With careful stock selection and strategic execution, you can achieve consistent weekly or monthly cash flow, regardless of your portfolio size.
Hedging your Portfolio Using Covered Call
Another big advantage of why I would use a covered call strategy is hedging. Perhaps you’ve heard the phrase “hedging your bets” before. Selling covered calls is a real-life example of hedging in the stock market.
Even if a stock you own experiences a decline in price, you still benefit from this strategy. When you sell a call option and collect a premium, you mitigate some of the potential losses. Let’s say the stock falls by 10%, but you collected a 5% premium from selling the call. In this scenario, while the stock investor faces a 10% loss, your loss is only 5%. By using covered calls, you can effectively limit your downside risk.
To further minimize risk while implementing the covered call strategy, you have the option to focus exclusively on ETFs such as SPY or QQQ. And by doing so, you safeguard yourself against any adverse news or earnings reports that might adversely affect individual stocks in your portfolio.
Steps to Execute a Covered Call
To start utilizing covered calls, follow these simple steps:
- Purchase a minimum of 100 shares of a stock you believe in and want to hold.
- Use your stock by selling a call option to someone willing to bet on the stock’s price rising.
- As the seller of the call option, you receive a premium for taking on the obligation to sell your shares at a higher price if the stock reaches the strike price.
- Enjoy the added income generated by the premium while retaining the ownership of your stock.
FAQ
What is a covered call?
A Covered call is one of the option trading strategies where you put your stocks as collateral and sell a call against them to generate income in the form of a premium. It is considered one the of safe strategies in option trading.
Are covered call ETFs safe
Yes, in general selling covered is considered a low-risk strategy to generate consistent income. And selling a covered call against ETF compared to stock is even safer as you safeguard yourself against any adverse news or earnings reports that might adversely affect individual stocks.
Can you make a lot of money with covered calls?
A covered call is a low-risk strategy where you generate consistent income. The upside per trade is capped in case of a covered call and hence you may not make a lot in a single trade however if you do it consistently then this is a very profitable option strategy.
How do you execute a covered call strategy?
Follow these simple steps to execute a covered call strategy:
1. Purchase a minimum of 100 shares of a stock you believe in and want to hold.
2. Use your stock by selling a call option to someone willing to bet on the stock’s price rising.
3. As the seller of the call option, you receive a premium for taking on the obligation to sell your shares at a higher price if the stock reaches the strike price.
4. Enjoy the added income generated by the premium while retaining the ownership of your stock.
Final Thoughts
Personally selling covered call and selling puts are two of my top option strategies that I use to generate consistent weekly and monthly income from stock. It is an incredible strategy that allows you to earn additional income from your stock portfolio.
It’s a low-risk approach that allows you to leverage your existing shares and generate regular cash flow. By mastering this technique, you can achieve market returns or even surpass them.
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