Monthly Income with Covered Calls
A lot of people like covered calls because you can sell multiple calls against the same stock over time. As long as the stock is not called away from you it is possible to generate recurring monthly income. And if the stock is called away from you then you can buy more shares with the cash you receive to replace the shares that were called away.
Let's look at a 3 month example:
One day you decide you want to own ABC stock trading at $60.
You buy 100 shares and that same day sell a call with a strike of 65 for $2.
When that option expires, you sell another one the following month.
And when that 2nd option expires, you sell a 3rd one.
On the 3rd month your stock goes up and is called away from you.
Here are all the transactions during these 3 months:
Date |
Action |
Cash |
Comment |
|---|---|---|---|
| Jan 3 | Buy 100 ABC shares at $60 | -6000 | You decide you like ABC stock, so you buy 100 shares. |
| Jan 3 | Sell 1 Jan 65 call for $2 | +200 | The same day you buy the stock you sell a call option, agreeing to sell your stock for 65 if it's over 65 by Jan 21 (expiration date of the Jan option). |
| Jan 22 | ABC at 62, Jan option expires | 0 | Because ABC is below 65 the option expires worthless. Next Monday you can sell a Feb option against the same 100 shares of ABC. |
| Jan 24 | Sell 1 Feb 65 call for $3 | +300 | You sell a call option, agreeing to sell your stock for 65 if it's over 65 by Feb 21 (expiration date of Feb options). |
| Feb 22 | ABC at 58, Feb option expires | 0 | Because ABC is below 65 the option expires worthless. Next Monday you can sell a March option. |
| Feb 24 | Sell 1 Mar 60 call for $2.50 | +250 | Since the stock dropped last month you sell a call option at a strike of 60 instead of 65 this month, agreeing to sell your stock for 60 if it's over 60 by Mar 22. |
| Mar 21 | ABC at 62, March option exercised | +6000 | Because ABC is over 60 the option is exercised. You are forced to sell your 100 shares for $60/share (strike price of the March option you sold). |
During the 77 days that you owned ABC stock (Jan 3 to Mar 21) it went up and down, with you eventually selling it for the same price you paid for it. However, during those 77 days you sold 3 call options and collected 3 monthly premiums (200, 300, 250).
Your total profit over the 77 days is $750... and that's profit on a stock that you sold for the same price you paid for it. On a percentage basis, 750/6000 = 12.5%. You made 12.5% income in 77 days, or 59% on an annualized basis.
If you still like ABC stock after it gets called away from you then you can take a portion of the $6750 cash you now have and go buy more shares. Or, if you now favor a different stock, you can repeat the process with a different stock. Generating monthly income with covered calls is mostly about patience; you need to let time pass so the options you sold can decrease in value (that's where your income comes from).