Planning on retiring soon, looking to earn passive income, or want to earn money from your stock holdings? If you answered yes to any of these questions then you should consider writing covered calls. Covered calls are easy and low-risk; the money earned goes to your account right away. The only effort on your part is research, prediction, and risk. Covered calls are a great additional income source because you’re making money off of the money you already have invested. You’re making money work for you in many ways! You could earn weekly with covered calls, quarterly with dividends, and cash-secured puts before purchasing a stock. Retiring with this strategy is not abnormal and all these methods provide passive income from your portfolio.
A covered call gives the right to someone to purchase your stocks at the strike price on the expiration date. In return, you receive a premium and can’t sell your stocks until the expiration date (unless you purchase back the option and then sell). It’s a very easy process on your part and you’ll need 100 shares of stock to do this.
If you’re new to covered calls then you should check out Passive Income with Covered Calls Options to learn more.
How much money is needed to earn a living with covered calls
There is no simple answer to this question, but I’ll guide you through examples. Covered call income will not stay the same every week. Some weeks you should expect to make $0 because of the uncertainty in the market. The market also experiences downturns, so your stock prices will fall and the covered call income will also fall, or you might have to write a call under your breakeven price if you want to continue earning money. With all these factors in mind, it could get tricky to do covered calls and rely on them as the main source of income. The more money you have, the better in this situation because you’ll be able to receive higher payments at one time to make up for the other times when you can’t earn money.
In general, you should expect 1-5% (or more) selling covered calls. How much you can earn depends on the volatility, strike price, and expiration date. High volatile stocks have the highest premium, but that’s with a catch. These stock prices move so fast that they can go up and down 10% in a normal week. So, people jump into these contracts to make money.
Set an income target
What is your income goal to live comfortably? Track all your expenses and add them up: mortgage/rent, food, utilities, clothes, etc. Write them all down. Multiply it by 12 then multiply it by 20. That’s how much money you should need to make a living with covered calls.
Example
Let’s say your goal is to make $5,000 a month with covered call income. Multiply that by 12, $60,000, and that’s your yearly income. Then to see how much money you need for covered calls, multiply that by 20. So that comes out to….. $1,200,000.
With $1.2 million you’ll be able to live with covered calls comfortably and expect to earn more than $5,000 a month.
Covered call stock examples with $1.2 million
data from October 30, 2022
Low Volatility - Coca-Cola (KO)
Current stock price: $60.70
Number of Shares: 19,769
Dividend Yield: 2.90% ($1.76)
Annual Dividend: $34,793.44
Number of contacts: 197
Weekly Covered Call Expiration Date: November 4, 2022
Strike Price (close): $61
Premium per contract: $55
Total Premium: $10,835
Capital gains per share (if hit strike price): $0.30
Total Capital Gains: $5,910
Strike Price (normal): $62
Premium per contract: $20
Total Premium: $3,940
Capital gains per share (if hit strike price): $1.30
Total Capital Gains: $25,610
Strike Price (far): $63
Premium per contract: $7
Total Premium: $1,379
Capital gains per share (if hit strike price): $2.30
Total Capital Gains: $45,310
Medium Volatility - Bank of America (BAC)
Current stock price: $36.25
Number of Shares: 33,103
Dividend Yield: 2.43% ($0.88)
Annual Dividend: $29,130.64
Number of contacts: 331
Weekly Covered Call Expiration Date: November 4, 2022
Strike Price (close): $36.50
Premium per contract: $49
Total Premium: $16,219
Capital gains per share (if hit strike price): $0.25
Total Capital Gains: $8,275
Strike Price (normal): $37.50
Premium per contract: $16
Total Premium: $5,296
Capital gains per share: $1.25
Total Capital Gains: $41,375
Strike Price (far): $39
Premium per contract: $3
Total Premium: $993
Capital gains per share: $2.25
Total Capital gains: $74,475
High Volatility - Tesla (TSLA)
Current stock price: $228.35
Number of Shares: 5,255
Number of contacts: 52
Weekly Covered Call Expiration Date: November 4, 2022
Strike Price (close): $230
Premium per contract: $640
Total Premium: $33,280
Capital gains per share (if hit strike price): $1.65
Total Capital Gains: $8,670.75
Strike Price (normal): $242.50
Premium per contract: $209
Total Premium: $10,868
Capital gains per share: $14.15
Total Capital Gains: $74,358.25
Strike Price (far): $250
Premium per contract: $104
Total Premium: $5,408
Capital gains per share: $21.65
Total Capital gains: $113,770.75
Some things to note from these 3 examples
We can draw a conclusion that higher volatile stocks pay more premium, but also come with more risk.
Further, the strike price, the less premium you receive.
You make the most money from the furthest strike price contract if it hits the strike price
20x your yearly income goal saved for covered calls is a good strategy and safe
Covered calls and dividends create a great income portfolio (coming up later in the blog)
It’s good to mix your portfolio with low, medium, and high-volatile stocks to have a range of income
Cash Secured Puts (Short Addition before purchasing stocks)
To do the covered call, you need to purchase stocks. Did you know you could earn money by purchasing stocks? It’s called cash-secured puts! Cash-secured puts are basically putting collateral to purchase 100 shares of stock at the strike price if hit and you receive a premium for it. Instead of buying the stocks right away, you buy them if the stock price is at or under the strike price. This allows you to purchase the stock at the price you want and earn a premium!
To learn more about cash-secured puts check out Get Paid to Buy Stocks: Cash Secured Puts.
How Much You Get Paid to Purchase the 3 Stocks Mentioned Before
Coca-Cola (KO)
Current stock price: $60.70
Strike Price (close): $60.00
Premium per contract: $60
Number of contracts: 200
Total Premium: $12000
Number of shares purchased: 20,000
Strike Price (normal): $59.00
Premium per contract: $24
Number of contracts: 203
Total Premium: $4872
Number of shares purchased: 20,300
Strike Price (far): $58.00
Premium per contract: $9
Number of contracts: 206
Total Premium: $1,854
Number of shares purchased: 20,600
Bank of America (BAC)
Current stock price: $36.25
Strike Price (close): $36
Premium per contract: $52
Number of contracts: 333
Total Premium: $17,316
Number of shares purchased: 33,300
Strike Price (normal): $35
Premium per contract: $19
Number of contracts: 342
Total Premium: $6,498
Number of shares purchased: 34,200
Strike Price (far): $34
Premium per contract: $6
Number of contracts: 352
Total Premium: $2,112
Number of shares purchased: 35,200
Tesla (TSLA)
Current stock price: $228.35
Strike Price (close): $227.50
Premium per contract: $610
Number of contracts: 52
Total Premium: $31,720
Number of shares purchased: 5,200
Strike Price (normal): $217.50
Premium per contract: $248
Number of contracts: 55
Total Premium: $13,640
Number of shares purchased: 5,500
Strike Price (far): $207.50
Premium per contract: $85
Number of contracts: 57
Total Premium: $4,845
Number of shares purchased: 5,700
Things to note about cash-secured puts
You get paid to buy the stocks (just do it!)
The further the contract, the more shares you get
You purchase the shares at the strike price on the expiration date
If the closing price is above the strike price then you keep the premium and your collateral back
Dividend and Covered Call Strategy
The best combination is known to mankind. Dividends and covered calls create the perfect income approach. You earn stable dividends just from holding stock and weekly covered calls for writing contracts.
How should you approach this strategy?
Don’t just pick out a stock because of its high yield. These stocks tend to be unstable and you’ll lose your money from capital depreciation. You have to look for strong companies with growing dividends.
Dividend stock picking criteria
Strong cash, low earnings expectations - Stocks expecting long-term growth between 5% - 15% are good and stable. They don’t have much to lose because they’re not expected to put out tremendous growth, so they operate their business as usual and slowly grow.
Strong cash flow - Cash is needed to pay dividends and cash flow shows us how much cash the business is bringing in.
Dividend growth - Aim for stocks with a minimum of 5 plus years of dividend growth
Low debt - Steer away from companies with high debt as the company will run into problems with having to pay the dividend and paying back the loans
These are the criteria for picking dividend stocks. With dividend stocks, you’re looking for value, not growth. Buying undervalued stocks with strong dividends makes a great addition to your portfolio to earn you passive income.
Great Dividend Stocks and how much you’ll earn with 1.2 million
Coca-Cola (KO)
Current stock price: $60.70
Number of Shares: 19,769
Quarterly Dividend per share: $0.44
Yearly Dividend per share: $1.76
Annual Dividend: $34,672
Bank of America (BAC)
Current stock price: $36.25
Number of Shares: 33,103
Quarterly Dividend per share: $0.22
Yearly Dividend per share: $0.88
Annual Dividend: $29,130.64
Dow Inc (DOW)
Current stock price: $46.93
Number of shares: 25,569
Quarterly Dividend per share: $0.70
Yearly Dividend per share: $2.80
Annual Dividend: $71,593.20
Enbridge Inc (ENB)
Current stock price: $38.92
Number of shares: 30832
Quarterly Dividend per share: $0.67
Yearly Dividend per share: $2.68
Annual Dividend: $82,629.76
Realty Income Corp (O)
Current stock price: $62.21
Number of shares: 19289
Quarterly Dividend per share: $0.74
Yearly Dividend per share: $2.96
Monthly Dividend: $4,757.95
Annual Dividend: $57,095.44
Using the income target goal by multiplying your desired income by 20, you’ll be able to achieve it with just dividends from some stocks. Dow, Enbridge, and Realty Incom Corp provide generous dividends to investors.
Downsides of covered calls with dividend stocks
Dividend and covered calls can provide two sources of income, but it does carry a risk from your dividend income. Firstly, your covered call income won’t be much because dividend stocks, especially high dividends are low volatility and contracts usually expire monthly. So, you’ll just have to rely on dividend yield for your passive income.
Stocks are being bought and sold too frequently. It’s not unnormal for a stock to hit the strike price and you to have to sell it. This can affect your dividend because if you sold your stock before the ex-dividend date and bought after, you won’t be able to earn a dividend. Make sure to look at the ex-dividend date and not write covered calls that week to receive your dividend.
You won’t be able to take advantage of dividend tax benefits. Covered calls are taxed in short-term capital gains, which doesn’t affect dividend taxes. But if the stock you bought was sold as an “unqualified dividend” then you’ll have to pay short-term capital gains on the dividends received.
Unqualified dividends - Dividends that don’t meet the IRS minimum holding period qualify for a lower tax rate. You’ll have to pay ordinary income tax on your dividends.
Qualified dividends - Meets the IRS minimum holding period. Common stock investors (investor has voting rights) hold shares for more than 60 days during a 121-day period that starts 60 days before the ex-dividend date, or the day after the dividend payment. Meanwhile, the holding period for the preferred stock (no voting right, but gets dividend first) dividend is more than 90 days during a 181-day period that starts 90 days before the ex-dividend date.
Unqualified dividends tax brackets (2022 due in 2023)
Qualified dividends tax brackets
Covered Calls with Index Funds
Index funds allow you to invest in a group of stocks all at once. They track funds that copy the return of the stock market indexes: S&P 500, Dow Jones, and Nasdaq. These are the big 3 and they have index funds just for them. So, this can introduce a great capital appreciation to your portfolio.
Index funds are heavily traded, but they’re not volatile. This is important because they have more covered call dates. Normal stocks have at most one date for contracts. Heavily traded index funds have 3 in a week. So, you could earn a lot from covered calls!
3 Best Index Funds
SPY (tracks S&P 500)
QQQ (tracks Nasdaq)
DIA (tracks Dow Jones)
How much you’ll make with 1.2 million invested in these index funds
SPY
Current stock price: $383.74
Number of Shares: 3,127
Dividend Yield: 1.61% ($6.18)
Annual Dividend: $19,324.86
Number of contacts: 31
Weekly Covered Call Expiration Date: November 9, 2022
Strike Price (close): $384
Premium per contract: $5.81
Total Premium: $18,011
Strike Price (normal): $394
Premium per contract: $2.19
Total Premium: $6,789
Strike Price (far): $401
Premium per contract: 0.90
Total Premium: $2,790
QQQ
Current stock price: $274.33
Number of Shares: 4,374
Dividend Yield: 0.70% ($1.97)
Annual Dividend:
Number of contacts: 43
Weekly Covered Call Expiration Date: November 9, 2022
Strike Price (close): $275
Premium per contract: $4.61
Total Premium: $19,823
Strike Price (normal): $282
Premium per contract: $2.20
Total Premium: $9,460
Strike Price (far): $290
Premium per contract: $0.75
Total Premium: $3,225
DIA
Current stock price: $325.35
Number of Shares: 3,688
Dividend Yield: 1.91% ($6.26)
Annual Dividend:
Number of contacts: 36
Weekly Covered Call Expiration Date: November 4, 2022
Strike Price (close): 326
Premium per contract: $4.25
Total Premium: $15,300
Strike Price (normal): $332
Premium per contract: $1.67
Total Premium: $11,952
Strike Price (far): $337
Premium per contract: $0.70
Total Premium: $2,520
Warren Buffet said, “In my view, for most people, the best thing to do is own the S&P 500 index fund.” Index funds seek market average returns and can be great for you if you’re looking to have a nice 7-10% yearly appreciation in your portfolio. We are using a big example in this blog, 1.2 million, but it’s just to show you it’s better to have a lot of money before deciding to rely on it as a source of living. Index funds provide stability and insurance for investors and in the long run, the market will always increase. With the power of compound interest, you’ll be able to appreciate your investments, earn weekly income, and earn a dividend!
10-year appreciation of $1,200,000 with an average SPY return (10%)
After 10 years you’ll have $3,112,490.95 in capital and you can sell it and rely on that for the rest of your life!
Covered Call ETFs
Want to own an index of stocks and earn monthly dividends? Covered call ETFs are the best solution. You’ll be able to buy the stock and the portfolio managers will do all the work for you. They’ll buy and sell stocks and write covered calls for you. Every month, you’ll get a dividend deposit to your account just for holding! Covered call ETFs are hands-off and passive income.
When looking for a covered call ETF it’s good to look at the track record and what the ETF is investing in. Some ETFs might have high yields, but you’ll still lose money by holding because their stocks go down. Also, make sure to look at the expense ratio. This is how much you’ll have to pay to own shares of the ETF.
Best Covered Call ETFs and Statistics
JEPI - JPMorgan Equity Premium Income ETF
Price: $53.35
Year to Date (YTD) Return: -15.20% (beating the market)
Annual Dividend Yield: 8.26%
Net Assets: $14.37 Billion
Expense Ratio: 0.35%
Shares: 22,492
Monthly Income: $8,260
Yearly Income: $99,120
Cost: $4200
QYLG - Global X Nasdaq 100 Covered Call & Growth ETF
Price: $22.12
Year to Date (YTD) Return: -31.33% (matching market)
Annual Dividend Yield: 13.50%
Net Assets: $60.69 Million
Expense Ratio: 0.60%
Shares: 54,249
Monthly Income: $13,500
Yearly Income: $162,000
Cost: $7,200
XYLD - Global X S&P 500 Covered Call ETF
Price: $39.81
Year to Date (YTD) Return: -21.56% (matching market)
Annual Dividend Yield: 12.46%
Net Assets: $1.93 Billion
Expense Ratio: 0.60%
Shares: 30,143
Monthly Income: $12,460
Yearly Income: $149,520
Cost: $7,200
These are the 3 best-covered calls ETFs and you can generate a lot of money from them! The year to date is down a lot for 2022 because of the high inflation and rising interest rates tumbling the markets. Now is your chance to buy these ETFs at low prices and earn passive income!
Risks of Covered Calls
Just like with any investment, covered calls do come with risk. The main risk of a covered call is inconsistent income. If your stock were to fall drastically then so will your covered call income. You might even earn $0 some weeks because you will lose money if you sell your stocks at the strike price. That’s why it’s good to have stable dividend stocks, which in return come with less money earned from covered calls.
Taxes aren’t also in your favor because the gains are subject to short-term capital gains which can cost you a lot of money during tax season.
You won’t be able to take full advantage of the gains from the stocks if they rise past your strike price. If the stock rises 10%, but your strike price was a 3% gain, then you’ll only get the 3% gain and the premium.
Conclusion
Covered calls are a great way to earn passive income with your stocks. Relying on covered call income can be challenging, that’s why I recommend you have 20x your desired income saved and invest that into the stock market. You have many different strategies available including cash-secured puts, dividend-covered call stocks, index fund-covered calls, and covered call ETFs.
To learn more about covered calls check out Passive Income with Covered Call Options.
To learn more about cash-secured puts check out Get Paid to Buy Stocks: Cash-Secured Puts.
To start investing and get a free stock check out Robinhood.
Continue learning and start with a small amount of money to understand covered calls!