Covered Calls For Income

You already know you need money and investments in place to secure your retirement. However you’d also like to have some consistent income before then. It’s widely known that stocks and options can provide the means for a secure and comfortable lifestyle, but you’d actually like to enjoy that income…now!


First off let me start by saying you can achieve consistent income from selling covered calls. And by consistent I mean month after month and year after year. After all, what’s the point of making great money in the market only to lose it all with one careless click of the mouse.


If you want to generate income from covered calls you have to figure out how much you’d like to make…then work your way backward.


How much do you need to trade?


Let’s say you want to generate an average of $5,000 a month in income. Let’s also say that you are a somewhat conservative investor and you don’t like volatility in your stocks. With that income goal in mind you typically expect to earn between 3-5% a month.


Since we expect to earn 3-5% a month from covered call writing and we expect that 3-5% to generate $5,000 in income, that would mean we would need to have a portfolio of stocks that had a combined value of  $100,000 to about $167,000.


The way we arrive at those numbers is to take the amount we would like to make each month ($5,000) and divide that by the percent we are aiming at (3-5%). This in turn tells us how much money we will need to achieve those returns.


$5,000 / 0.05 = $100,000.    $5,000 / 0.03 = $166,666 (rounded to $167K for ease)


When you sit down and work out the numbers in this manner it really gives you a handle on how to plan your trading strategy and how long it might take you to reach your goal. An important thing to keep in mind here is that this is the ideal scenario. We know that the market seldom moves in just one direction. Along the road to a $100,000 or even a $1 million portfolio are months of getting called out on our covered call positions, bad earning reports that cause our stocks to drop, along with the everyday unpredictability of the market.


Covered call vs. Rental property


One way to think about stock ownership for the purpose of selling calls is to compare it to buying a piece of real estate as income property.


An apartment building is not purchased with the intent to buy and sell it over and over again. It is bought to bring in consistent monthly income by way of each apartment’s rent. Of course the value of the actual building will go up and down with the housing market but those rents from each tenant will continue to come in regardless the value of the actual property.


Covered calls, or owning real estate for that matter are not that cut and dry but it does helps to illustrate the point of this strategy…to acquire an asset that produces a constant cash flow. The cost of the property or the cost of the shares of stock are the price of getting in the game. Once you have the asset, be it stock, real estate or any other investment vehicle, you are on your way to producing income.


When do you really make money?


Of course there are other factors to keep in mind, one being when you will break even.


The first thing you should do when you enter into any investment is to figure out your break even or at what point you will make your money back. This is not only on a trade by trade basis, but on your portfolio as a whole. If you have a $50,000 portfolio you should figure out, based on your average return, when you will make your initial $50,000 back. After you have recouped your initial capital this is the point at which you really start to produce profit. Think of it as the moment when you pay off the mortgage on your investment property.


The moment you generate enough money to cover the initial cost of the stocks you are officially profiting.


I’d love to hear about some of the stocks and trades that you have made to increase your income and profits. Leave a comment below and please share this page.


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