The Average Joe Investor: I Back-Tested a Covered Call Strategy with Real Option Data

Investors have several ways to increase their income. That can include investing in dividend growth stocks. Or investing high-yield stocks such as real estate investment trusts or pipeline companies.

Investors looking for more have other tools as well, provided they’re willing to go to the options market. Call options can be used to generate extra income. This strategy of selling call options on stocks an investor owns is known as covered call writing.

There are a few caveats. As an option contract is standardized for 100 shares, an investor must first own 100 shares of a stock.

Using a dividend stock like Coca-Cola (KO), for instance, buy-and-hold investors can earn a 3.1 percent dividend. That’s based on $0.46 in quarterly income per share.

While a single option contract may go for just a few cents, multiplying that out by 100 shares can mean monthly returns and extra $40-60 per month.

That can greatly increase the annual total income, adding another 4-5 percent to total returns.

However, there are risks to any strategy. If shares soar higher, investors risk being called away. That may mean having to get back in at a higher price later.

Or finding a new stock to invest in with the capital. Such events frequently occur when selling covered calls.

To look at the full strategy and how it works, click here.