Generating Huge Income with Covered Calls

Covered calls remain one of the best ways for investors to draw an income against their long term stock holdings. There are several strategies you can implement to generate the most income possible while limiting your downside.

Maximizing Investment


Unlike other trading and investing strategies that require only a small investment for each trade, generating an income with covered calls requires that nearly all of your balance is invested at one time. Where non-market neutral portfolios are usually predisposed to market action and risk, a covered call portfolio, even when market long or market short, is neutralized by the covered call income.

Work Dividends, Too


You'll find that the best covered call income portfolios are those built around high dividend stocks for two reasons. First, dividend stocks provide an extra yield that can be pocketed each year. Plus, dividend stocks have much lower betas, and they are not as volatile as the overall market. The popularity of dividend reinvestment plans helps keep dividend stocks up, even when the rest of the market is down.

Your goal with a covered call portfolio should first be consistency in stock prices and then consistency in income. Stable stock prices, especially in dividend stocks, opens the door to collect large streams of income from your stock holdings without unnecessary risk taking.

Write Every Month


To get the most bang for your buck with a covered call portfolio without accepting more risk, you'll have to write covered calls each month against your stocks. While long dated stock options may look more profitable, and they can be, they also set you up for more risk. It is, after all, much easier to see a few weeks into the future than several months, and writing covered calls each month will not only provide a consistent income stream, but also shave off excess risk of loss.

Writing new calls every month does not mean waiting until the last few days of each contract. Instead, you should look to write new calls roughly one week before the new contract rolls over. Doing so allows you to have your calls on the market at the same time other investors are looking to roll over their positions. The premiums for covered calls are at their widest at this time.

Important Tidbits


Out of the money stock options will generate less income, but they're also far less likely to be called. If your goal is to sell your stock, however, you may consider writing in the money calls for the chance to lock in your sale at the current price and even profit should the contract expire out of the money.

Do not panic if at the end of a contract, the option is in the money. This is a common occurrence, and the income will, over time, replace any lost capital gains from your holdings. Also, never forget that an option can be rolled out for another month if you believe the appreciation is short lived.

Covered calls are an excellent income strategy for those willing to invest the time to monitor their portfolios and roll over options each month.
Tim Ord
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