You need money and investments in place to secure your retirement. Everybody knows that.
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. Wouldn’t it be nice to be able to enjoy some of 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 tap or click.
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 covered call income. Let’s also say that you are a somewhat conservative investor and you don’t want much volatility in your portfolio. With that income goal in mind, you’d typically expect to earn between 3-5% a month.
Since you’re looking to earn 3-5% a month from covered call writing and you expect that 3-5% to generate $5,000 in income, that would mean you would need to have a portfolio of stocks that had a combined value of between $100,000 to $167,000.
The way you arrive at those numbers is to take the amount you would like to make each month ($5,000) and divide that by the percent you are aiming for (3-5%). This in turn tells you how much money you 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. You know that the market seldom moves in just one direction. And even if it’s in a long term trend, no trend will last forever.
Along the road to a $100,000 or even a $1 million portfolio are months of getting called out on your covered call positions, bad earning reports that cause our stocks to drop, and 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 an income property.
An apartment building is not purchased with the intent to buy and sell it over and over again. It’s 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 of the value of the property.
Owning covered calls and buying real estate are not that cut and dry, but it does helps to illustrate the point of this strategy…to acquire an asset that produces a consistent cash flow. The cost of the property and the cost of the shares of stock are the price to get 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?
The three things you must always consider with any type of investment are when will you lose money, when do you break even, and at what point do you become profitable.
The first thing you should do when you enter into any investment is to figure out your break even point. Put another way, ‘when will you have gotten the money back you put into this trade’.
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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