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Covered Calls Investing: Generating Cash from Stocks

Updated on January 21, 2009

Covered Calls

Covered Calls is a conservative investment strategy where you can generate regular monthly cash-flow from stocks.

It is considered so conservative that Covered Call writing is allowed to be done in retirement accounts, such as IRA's.

Generally, monthly returns are small, on the order of 3% to 5% per month.

Mechanics of the Covered Call

A "Covered Call" consistents of two parts:

  1. The Stock
  2. The Call option

This strategy is called a "Covered" Call because you own the stock that you write (sell) the call option on (your call option is "covered" by your stock).

Covered Call "writing" is also referred to Covered Call "selling" because you sell (write) the call option, as opposed to buying the call option.

You must buy stock in 100-share increments, since 1 option contract controls 100 shares of stock.  So you would buy shares of stock (or already own the stock) in blocks like 100-shares, 200-shares, 500-shares, etc. 

For example:

  • Stock XYZ at $10/share
  • Call option on XYZ paying $1

If you did not already own the XYZ stock, then you would purchase 100 shares of XYZ, which would cost you $1,000 (100 shares X $10 share).  We will omit commission charges for these examples.

Then, you would sell (write) the call option, which would collect $1 per share (1 contract controls 100 shares of stock)...we would collect $100 from selling this call option contract.  If we would have bought 200 shares of stock, we would have sold 2 option contracts.

This example would yield a return of 10%, calculated as:

  • $100 collected (from selling the call option) divided by the $1,000 that we spent from buying the stock ($100 / $1,000 = 10% return).

It's that simple.

That is the mechanics how to do a Covered Call play. 


XYZ Example

Thank you, and Contact Information

Thank you for taking the time to visit our Hub on Covered Calls Investing.

Best Regards,

Shane Johns, President


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