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  • Writer's pictureJohn Tasci

Passive Income with Covered Calls Options

Updated: Oct 2, 2022



Are you a stock investor with enough capital to own 100 shares of a stock of your choice? If so, you can earn passive income with covered calls.


Covered calls are performed by selling an option where you short a call at a specific price and specific date of the shares you own.


That might sound confusing but super easy to understand with this example:


  • You own 100 Shares of Apple Stock.

  • Apple trades at $168.80 which means you have $16,880 worth of Apple Stock


Apple Covered Call Options Chart - Passive Income with Covered Calls Options - Tasci Finance

Here is the options chart where you will need all your information.


What you need to pay attention to:

  • Strike Price

  • Breakeven

  • Price

  • Expiration Date



Strike Price - If the stock is at this or past this price by the time of expiration then you will be forced to sell at the strike price. So, if you sold a contract for Apple at a strike price of $170. You will be paid $115 (1.15 x 100). If the stock goes up to $175 by the expiration date then you will still have to sell it at $170 a share.


Breakeven - The price the stock is equal to, after selling the stock at the strike price plus the premium received. Looking back at the Apple chart. $170 strike price with a premium of $1.15 has a breakeven of $171.15. If the stock price goes above breakeven then you would've made more money by not selling the contract. That doesn't mean you lost money, but you could've made more money.


Price - How much you would be paid for selling this contract multiplied by 100. $170 contract price is $1.15 which would result in a $115 premium.


Expiration Date - The date the contract expires and if it's in the money (at or above the strike price) then you will be forced to sell the shares and keep the premium. If it's out of the money (below strike price) then you will keep the shares and the premium.


Either way, if your call gets assigned or not you will still keep the premium. So, it is important to keep track of your premiums to sell the contracts at the best price and earn more than the price you bought them.


Example


You buy 100 shares of Apple stock for $150 each.


You sell covered calls weekly and after 3 months (12 weeks) your call gets assigned.


Unfortunately, the price you had to sell your stock was less than you paid.


Outline


100 shares of Apple stock for $145 but you earned $50 premium weekly. $50 x 12 = $600. You sold the stock for a $500 loss but earned $600 through covered calls. This resulted in a profitable trade of $100. Even when the stock went down, you were able to profit by stacking the premiums.


How to sell contracts step by step?


  1. Buy 100 shares of a stock

  2. Go to the options chart

  3. Click "sell" and "call"

  4. Click strike price you would like to sell

  5. Insert the needed inputs and click submit


Execution is simple, strategy is not.


You can continuously do covered calls and earn passive income through this method. Reinvesting the option gains will speed up your process into making covered calls a big stream of income. You will increase your cash possession and decrease break-even on stocks you own. This is the best example of having money work for you and should be taken advantage of by every stock investor.




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