Of the many unique advantages offered by option trading, perhaps none is as popular as their ability to generate passive income.
That’s right. Just as a real estate investor can create cash flow with a rental property, a stock owner can create cash flow by adding option contracts to the mix. There is a well-known strategy – at least among option enthusiasts – named the covered call that allows you to capture some income month to month.
The basic structure of the covered call is to buy 100 shares of stock and sell one call option. By selling the call option, you obligate yourself to sell your stock at a specific price (known as the strike price). In exchange for bringing on this obligation, you are compensated by being paid a premium.
Consider the following example as an illustration:
Suppose you bought 100 shares of the Market Vectors Gold Miners ETF (GDX), currently trading for $24.30, for a total investment of $2,430. To generate some income, you could sell the June 24.50 call option for $100. In exchange for obligating yourself to sell the stock at $24.50, you received $100 of income. That’s an impressive 4% return in just over 6 weeks.
And here’s the powerful part. After the June expiration, you could sell a July call option, then August, September, October and so forth. Month to month, you can sell calls on your stock position to continue to generate income.
Covered calls should be especially appealing to investors owning shares of stock primarily for their dividends. These types of investors are already in the market for income and, in many cases, are capturing a measly 2% to 4% in dividend yields for the entire year. By adding covered calls to the mix, income seekers could potentially double or triple (if not more) the cash flow generated by their investment.
Covered Calls are one of many powerful option trading strategies we teach in our curriculum of financial market trainings. If the idea of boosting the yield of your stock investments strikes a chord, come join one of our trainings and let us teach you how to make options work for you.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.