Money For Nothing: Covered Calls Primer

Over the long-term, the stock market trends up. Investors can be taken by surprise during those periods when the market trades down. Or even by those long periods where the market trades sideways.

That’s why it’s important to have an investing strategy in place to continue to grow one’s portfolio no matter what the market is doing. The easiest way for most investors to get started is by learning how to sell covered call options against their existing stocks.

The strategy is simple. It allows investors to continue owning shares of a company, potentially through a short-term decline. But selling covered calls adds extra income to a portfolio. The only possible “downside” is if investors get called away on their shares.

But done right, investors can grab extra money. Added to dividend stocks held for the long-term, the results can add up over time.

Traders looking to sell covered calls first need to own 100 shares of a stock for every contract they want to sell.

And while strategies can vary, investors should find a consistent strategy, such as finding options with a strike price at least 10% higher than current prices. Many volatile stocks will make that easy. But less volatile stocks may not offer sufficient option premium relative to the risk of being called away.

That’s why covered call writing is a bit of an art as well as a science.

To read the full primer on how to add covered call writing to your portfolio, click here.