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How to use covered calls to boost your income.

Updated on December 9, 2012

Covered calls can nearly double your yield


Covered calls can almost double an income investors' yield. With the right stock and a little research, you can use covered calls to double your yield. That means you take home twice as much as the person who invested only for the dividend.

For instance let's look at a stock priced at $20 that pays a 40 cent annual dividend, the dividend yield to you is 2%; better than a certificate of deposit but not great. We know you would only invest in a lower risk stock so we can assume that even if the stock price goes up and down (as is likely in our current economic environment) you will still get your 2%... What if you could double your yield with no more risk than just owning the stock; that would appear to be a good thing? Right?

In this situation, what seems to be too good to be true is attainable. Intel is an excellent example. You can buy Intel, symbol INTC, at about $22. Intel will pay their quarterly dividend of 21 cents per share on September 1, 2011 for an annual yield of 3.8%. You can sell another person the option to buy your stock at $24 between today and October 22, 2011 and they will pay you 30 cents. If INTC's stock price is greater than $24 on October 22, 2011, that person will most likely buy it from you. Notice that if they buy it from you, your immediate gain of $2.00 per share is a 9 percent return. When you add in what the person paid for that privilege and the dividend your return is about 11.4 percent.

But, the point of this lesson is not capital gains; it is how to increase your income from a stock like INTC. If you wrote that call today on INTC, and the stock price does not exceed $24 on October 22, 2011, you will continue to own INTC. Intel is volatile meaning that in the future you may be able to sell another call on your stock. Let us say your income from the next call again is 30 cents. Since I have owned INTC for a long time and have sold many calls on it, I know of what I speak. Selling two calls a year on INTC is very attainable.

Your income for one year on INTC will be the sum of four dividend payments of 21 cents each, and two call premiums of 30 cents each. Based upon your buy in at $22 per share, your yield will be about 6.5%.

I challenge you to find an income investment that has increased your income every year for at least 5 years and that has the potential to pay you greater than 6% on your investment with just a little bit of effort.

The caveat, of course, is the stock price could go down to around $12 as it did in November 2008. Even if that happens, you still get that dividend and it goes up every year. Your chance to sell calls will come again.

Covered calls can enhance your yield...trust me.

VTR

TheMoneyMadam


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