How do you measure the financial health of a business or public company? They are measured by the amount of cash flow they produce. All investors understand this concept as this leads to the earnings reported and financial strength of the company. Covered call investing provides a large amount of cash flow.
There are several styles of covered call writing. Some investors never do more than write calls on their portfolio stocks that can be an art within itself. Many investors buy stocks for the express purpose of writing covered calls on them and then sell the stocks or let them be called away at expiration. There are covered call strategies for the active trader who seeks action, for the shoot for the moon directional trader, for the lazy writer and for those with a long-tern horizon. Then the conservative crowd are fearful of risk and seeking low-risk or limited-risk trades.
As an investor, you can have covered call your way. No matter your lifestyle, if you have a computer or smart phone, there is a covered call strategy that will work for you. Is it riskless? No – but there are ways to lower your risk in the trade like insuring the trade.
If you are an investor interested in creating income streams. Then, covered call writing should be part of your portfolio. You can write calls against your dividend stocks to enhance your income. I like to think about covered call writing as a monthly income stream.
I can sell a call option each month on a stock I own. This premium income is automatically deposited into my account at the transaction completion. Now, do this every month for a year. Then, add up the amount of the premium income for the 12 months and divide it by the purchase price of the stock. Compare this calculated covered call yield to the stock dividend yield. Which is higher? Typically, the stock dividend yield may be 3-5% but the covered call yield will be 15-20% yield.
For an income investor, a call yield this high is a great stream of income and it provides some downside price protection. Using the “rule of 72” will result in doubling your investment in 3.5 years. Even better, you can add $1,000s of income each month to a medium size portfolio.
The theory of covered call writing explained here should catch the eye of the income investor. This clearly shows why covered call should be a lifestyle-making portion of your investments. We like to say Covered Calls for Life is where it is at for multiple streams of income.
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