Covered Calls - Make Extra Income from Your Stocks

What Are Covered Calls?

Covered calls are a way to earn extra money from stocks you already own, much like creating your own dividends. Here’s how it works:

1. Own the Stock: You need to own at least 100 shares of a stock.

2. Sell a Call Option: You give someone else the right to buy your stock at a set price (strike price) by a certain date (expiration date).

3. Collect the Premium: You get paid a premium for selling this option, which is like earning an extra dividend.

How Covered Calls Work: An Amazon (AMZN) Example

Let’s break it down with a simple example using Apple stock:

1. You Own the Stock: Imagine you have 100 shares of Amazon (AMZN), and the stock is currently priced at $199.50.

2. Sell a Call Option: You decide to sell a call option with a strike price of $215, expiring in two weeks. This means you are giving someone else the right to buy your Amazon shares for $215 each within the next two weeks.

3. Receive the Premium: For selling this option, you get paid $0.55 per share. Since each option covers 100 shares, you receive $55 in total. This money is yours to keep no matter what happens with the stock.

What Can Happen Next?

1. Stock Price Stays Below $215:

   • This is a good outcome for you. The option expires worthless because the buyer won’t want to pay $215 when they can buy the stock cheaper in the market. You keep your $55 premium and your 100 shares.

   • You can then sell another call option and earn more premiums.

2. Stock Price Goes Above $215:

   • The buyer will use the option to buy your shares at $215 because it’s cheaper than the market price. You sell your shares for $215 each, which is more than the current price of $199.50.

   • You still keep the $55 premium, but you no longer own the shares.

3. Stock Price Drops:

   • The option expires worthless, and you keep the premium. However, your shares are now worth less. The premium you received helps offset some of this loss.

   • You can hold onto your shares and possibly sell another call option in the future.

Is This Strategy Right for You?

Covered calls are great for both new and experienced investors, especially if you hold stocks for the long term. This strategy lets you control your risk and earn extra income.

Pros and Cons

Pros:

• Extra income through premiums, like creating your own dividends.

• Easy to manage once set up.

• Flexible risk management.

Cons:

• Limits your profit if the stock price rises significantly.

• Doesn’t protect you if the stock price falls.

Conclusion

Selling covered calls is a smart way to make extra money from stocks you already own. It’s like creating your own dividends by getting paid to wait. If the stock price stays below the strike price, you keep the premium and your shares. If it goes above, you sell at a profit and still keep the premium. Just remember the risks and be comfortable with possibly selling your shares at the strike price. This strategy works best for stocks you plan to keep for the long run.