Selling Covered Calls For Extra Income

As the saying goes, “When you know better, you do better.”  I have changed up my strategy after watching what was going on with ARR.  I was a champion for this stock for months because I felt that it was eventually going to go back up to its $7-$9 price range.  Well you can’t wish something to happen, there has to be concrete steps and data to follow it up.  ARR never improved its financials and consequently the value of the stock stayed stagnant even when comparable stocks were rising. 

After a conversation with a friend of mine I realized that a safer and possibly more lucrative strategy would be better.  If you buy a well-known blue chip stock with sound financials that has enough volume, you can sell covered calls each month for steady income, much like the dividends I was seeking with ARR.  My own personal requirement was to find a stock that was trading below $20 so I could load up on it to have enough to buy at least 200 shares.  As you know (if you have traded options before) you have to have at least 100 shares to buy or sell 1 options contract.  To make the minimal return that I want to make I need to sell at least 2 options contracts.  The stock I chose was Ford (F).

Here is some more information on covered calls.  Many of the people and sites I’ve come across go into a lot of detail about covered calls but just know it’s not as complex as a lot of people make it seem.

Investopedia – Covered Calls

Trade King – Covered Calls

Alan Ellman - The Blue Collar Investor

Monthly Income From Covered Calls

If you look at the Bid price, that’s what you will be selling your call at.  Just remember that the Ask price is what you will be buying your call back at if you choose to buy it back (you will do this if you want to keep holding your shares and don’t want to be assigned at expiration).  To make any money you want the Ask price to keep getting lower so you can buy the options back for a price cheaper than you sold them for (buy low, sell high).  Either way if you sell a call at a strike price higher than the price you bought the stock (out of the money), then you have already made your money so you can just sit back and wait for expiration (always factor in fees and commissions).

Always buy the next month’s option because you want enough movement to occur in the time value of the stock.  Some people trade the weekly options.  I haven’t tried that yet but I may.

If you are new to covered calls, after you watch some of the videos and read some of the information on the links I posted, all of what I just said will make more sense and hopefully will simplify what you have learned.

Let me know how your trading goes by leaving a comment and if you have any other ideas I would love to hear them.