How to Sell Covered Calls To Generate Monthly Payouts

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Income investors always are on the prowl for new ways to enhance their stream of investment income. It is one thing to have a meaningful portion of one’s income portfolio invested in traditional income asset classes where yields are 1.0-3.0%. That doesn’t even cover the rate of inflation and the tax man when these two components are stripped out. Breaking even in ‘risk-on’ investing is a poor proposition. Having a decent weighting in the “right” real estate investment trusts (REITs), business development companies (BDCs), master limited partnerships (MLPs) and other high-yield income classes of securities is an important and valuable component to an income portfolio that seeks a blended yield in excess of 6-8%. But there also is another way of generating extreme income on a monthly basis that an eighth grader can execute, and I want to acquaint you with it.

As the market has recovered from its late-summer correction, investor confidence is back on the rise along with the time and premium values for stock options. For some, the idea of incorporating an option strategy into your overall income plan may sound foreign, but if utilized in a manner where option risk is sold to the market and not purchased, the equation of its value as a strategy takes on a whole new meaning. I’m speaking of the rationale behind “selling covered call options,” a strategy that most investors have some level of familiarity with, but where a low percentage of them have put to work.

Roughly 90% of all call options expire worthless. One reason is because the emotion of short-term greed causes investors to reach too high when setting a strike price. Another reason is not having enough time for the underlying stock to rise to a level that rewards the long call buyer. The beneficiary of those 90% of expiring calls that end up worthless is the investor who sold those calls to overly eager call buyers. The sellers are banking 100% of the expiring call option premium and it is exactly the basis of a successful covered call option strategy.

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I’ve tailored and launched a new, easy-to-understand covered call trading service named Quick Income Trader. That service’s strategy is about as A, B, and C as it gets for new and experienced income investors. I select only seven stocks to work with at any given time to maintain a streamlined set of market leaders. That approach makes keeping track of the portfolio simple. I love simplicity and most investors I know do too. I put together a watch list of the best growth stocks that are breaking out to the upside and are “must owns” for professional fund managers — stocks such as Salesforce.com (CRM), Activision Blizzard (ATVI) and Virgin America (VA), all recent market winners fueled by high-octane earnings.

By buying these and other high-performance stocks in November and selling just-out-of-the-money calls that expire in December against each position, an investor can bank 3-5% for the month just in option premium received. If those underlying stocks close above the strike price the day the options expire, the returns are higher, in the neighborhood of 6-10%… for a one-month holding period. For a $50,000 account dedicated to this strategy, one can roll his or her capital about every 45 days to generate $1,500-$2,500 over the same time frame. We’re talking 25-40% total return over the course of a single year. And when you sell call options, you get paid immediately.

As in any strategy, there are some obvious variables that make the formula gel as it is designed to do. The market has to be relatively stable. That’s a given. It also is important to cut any losses to no more than 10% in any position that is moving lower from the cost basis plus the option premium received. Beyond these two factors, finding high-power stocks that pay out lofty option premiums is where I come in. I lay out each trade and its parameters. All investors need to do is get a cup of coffee and take 10 minutes to enter the trades for the month, watch the cash from the sale of call options hit their accounts and get on with the rest of their day, week and month. It really is just that easy.

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I highly recommend taking a tour of the Quick Income Trader service found on my website, where a complete and free tutorial of how the service works is available. The idea that investors can own the best and most respected stocks in the market and garner tremendous income from a tightly knit set of names falls right into the category of having your cake and eating it too. As we enter the best five to six months to be long in the market, I encourage every income investor seeking to ramp up cash flow to take a serious look at Quick Income Trader. It might just be the best holiday gift you could purchase for yourself or someone else.

In case you missed it, I encourage you to read my e-letter column from last week about a shipping company that is taking terrific advantage of China’s need for oil. I also invite you to comment in the space provided below.

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