I hate to say tell you this… but if you’re an income investor, then chances are you’re leaving money on the table.
Why? Because I’m willing to bet that 9 out of 10 of income seekers haven’t even considered the simple technique that can deliver extra “bonus” dividends to their account again and again throughout the year.
Add it all up, and we’re talking about substantially more than what most investors are getting from dividends alone. In fact, it’s not unrealistic to see 20%-plus annual income on a regular basis.
I’m talking about covered call options.
Now, I know what you might be thinking — probably something along the lines of: “Aren’t options risky?” or “I don’t know the first thing about trading options.”
But what if I told you that covered calls are quite possibly the safest way to trade options that exists — and what’s more, savvy traders have been using it to juice their income for decades.
Here’s how it works…
A call option gives the buyer the right — but not the obligation — to buy a stock from the call seller if it’s trading above a specified price before a specified date.
When you sell a call option, you accept the potential obligation to sell a particular stock at a specified price at a set time in the future. When you sell a call, you generate instant income in the form of a premium.
Now, I only recommend selling “covered” calls. A covered call requires you to sell call options on a stock you just bought or already own. Not only is this strategy safer, the beauty is that it allows income investors to earn more from their holdings than what they simply would with dividends alone.
These are the “bonus” dividends I’m talking about.
Getting Started With Covered Calls
When trading a covered call, it is important to start with quality companies. These are companies that have a good reputation and are not likely to suffer an unexpected drop on bad news.
As I mentioned earlier, selling covered calls is a conservative strategy. So to maximize income, we need to write calls on stocks that offer large premiums. This will often be large-cap stocks that are in the news for one reason or another.
Large-cap companies with decades of operating history tend to pass the “good reputation” test. I like to start my search for quality with large-cap stocks that are included in a major market index. However, since volatility — and, therefore, income from options premiums — is usually low on large caps, it can be difficult to generate double-digit annual gains only writing calls on blue-chip stocks.
Occasionally, though, large-cap stocks will experience higher-than-average volatility. This can occur when investors overreact to a company missing earnings estimates or when a stock split is announced. Selling in the broader market can also boost volatility and options premiums. I try to take advantage of those opportunities when they occur, but you can’t expect to find trades like that every week.
Small caps can also lend themselves to this conservative income strategy if you do your research and only select stocks that offer value. In my opinion, the best trades are with small caps that remain undervalued for some time, allowing us to sell multiple calls on the same shares.
Selling covered calls can be a profitable strategy in any market environment. When interest rates are low (like they are now), covered calls can provide the income that fixed-income investments (like bonds) just can’t deliver. And when interest rates rise, calls actually become more valuable. This means covered calls can provide income for life… as long as you find the right stocks to trade.
Ready To Get Started?
There’s a lot more to say about covered calls, but it all boils down to this…
Covered calls are the closest thing to a win-win situation that you’ll get in the financial markets. The secret is only selling options on stocks you want to own. If you follow this one rule, you’re ahead of 90% of options traders.
You’ll not only pocket the “bonus” dividend you receive from your trade — you’ll have the opportunity to repeat similar trades again and again. (And don’t forget about dividends, of course.)
If you’d like to learn more, I’ve updated a special report that tells you everything you need to know. You can access it here.
— The Option Specialist