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Selling Covered Calls for Monthly Income – The 100% Win Rate Trade? [Updated for 2021]

selling covered calls for monthly income

Interested in finding out how to go about selling covered calls for monthly income? Well, if so, you’ve come to the right place amigo!

I get so many different questions from people just starting out in their trading journey – especially when it comes to trading options.

“What is a call?” “What is a put?” “Is there a way to find out what the chances of my trade being successful BEFORE I place it?” “Can I make a living trading options?” “What is settlement date in stock trading?”

The list goes on and on.

And to get started on the topic of how to sell covered calls to make money, you’ve got to at least know the basics of trading options before you go any further.

Otherwise, there’s a good chance you’ll just end up getting more confused, stuck and unable to move forward.

So if you’re still a little fuzzy on trading options and some of the basics, you need to get up to speed before continuing, as selling covered calls for monthly income is more of an advanced strategy.

To catch up, I recommend you pick up a copy of the book, “How to Make Big Money Fast Trading Options” and study it a bit until things become clear. (It shouldn’t take very long as the book’s an easy read and not too long.)

So once you’ve done that we can keep going and investigate this strategy further.

The Basics of Selling Covered Calls for Monthly Income

One of the areas that options trading really shines in is the amount of flexibility you have to create different income generating trades.

Everything is so customizable – from the strike you choose, to the date, which side of the trade you take (buy or sell) – you can really adjust pretty much anything you want in order to get the results you desire.

And when it comes to setting up trades that can pay you weekly or monthly, trading options is easily the best thing to do.

You will never have this sort of flexibility trying to buy or sell stocks on their own, and in most cases when you trade options you’re able to risk a little with the potential of gaining a lot.

So, with that out of the way let’s investigate this strategy and how you can go about setting it up to generate monthly profits.

The first thing you need to do is understand WHEN you should use this strategy. Knowing how to use it is great, but if you don’t know when to apply it you could set it up correctly only to find yourself losing money.

So when you’re selling covered calls, you will only do this when you feel that the price of the underlying security (the stock, ETF, Index etc) won’t rise much higher than it’s current value.

When you sell the calls you get paid a premium in exchange for forfeiting the appreciation beyond the strike price.

To determine if stock will go up in price, you will have to look at the long term historical charts. From these, you’ll have to spot a trend or chart pattern that indicates the stock might be stagnant or about to trade within a range.

(If you aren’t up on your chart patterns, I suggest reading this book here to get a handle on them.)

Once you’ve found a stock that won’t increase in value much, you’re ready to move onto the next step.

After that, you want to do a little investigative work and find out how many shares each option contract controls for that stock (most often, 1 option contract controls 100 shares).

This will allow you to figure out just how many stocks and options contracts you’ll need to buy.

For this strategy to work, you’ll have to buy enough options contracts in order to cover the amount of stock you purchased.

So if you’ve determined that each option contract controls 100 shares of the stock, you would buy 100 shares of the stock for each option contract you wanted.

If you want to sell 2 call contracts (and the underlying security has option contracts that control 100 shares per each contract) then you would buy 200 shares of the stock.

You would start the trade by buying the 200 shares of the stock at the current market price.

Once you’ve done that, you’re ready to sell your call contracts and collect your  premium!

To do that, you would choose an out of the money call (where the strike price is higher than the current trading value of the stock), choose a timeframe (expiry date) that was at least 1 month out and sell the calls and collect your money.

NOTE: To sell covered calls, brokers require a higher minimum deposit amount. With a margin account good brokers (like Questrade) only require 30-50% of the stock value in your account first. But in order to sell options, they require more money in order to approve your account (even though your loss is still limited when you place covered calls.) For more details, you can check it out here but just be aware that you need to have your account approved and set up properly before you can jump in and place one of these trades.

Now, choosing the strike price is something of a art that will come with some practice as you’re wanting to choose a strike that’s close enough to the current trading value of the stock (because this will give you more cash in the form of premium when you sell the calls) while choosing one that the stock value won’t climb above.

Typically, most traders will choose a strike that has been seen as a level of price resistance before.

Now, this may all seem like you can get free money using this trade but there is some downside to selling covered calls for monthly income.

The main one is that if the stock you purchased drops, you could lose more money than you gained when selling the calls.

But if you’re happy owning the stock long term then the premium you got might help to offset the loss.

Now, if the stock rises above your strike price, you’ll be called out of your position. This means that you will keep the premium that you collected, but will have to sell the stocks you bought.

Let’s look at a couple examples.

Below you’ll find an options chain for CAT and the expiry date is about 1 month away from the date the picture was taken. At the time the picture was taken CAT was trading at $168.95

covered calls for income

From the picture above, you can see that the 175 strike calls were trading at 2.59/contract

So let’s say you wanted to collect some monthly income and sell covered calls on CAT.

You would first buy 100 shares of CAT and then sell the 175 strike calls for November 13.

This would give you $259 in premium ($2.59 x 100 shares per option contract).

Scenario #1

The price of the stock stays below the strike you sold the calls at and above the value you bought the shares at. Let’s say the price of CAT at expiry on November 13th was $170. In this case, you would have collected the premium $259 and you could sell all 100 shares of CAT for an additional amount of $105. So your total increase would be $364 on the trade.

Scenario #2 

The price of the stock drops below the price you bought the shares at. If on the other hand, the price of CAT dropped to say $165 at expiration, your trade results would look like this: You collected $259 in premium but the shares of CAT dropped $395 ($3.95 x 100 shares). So if you sold all 100 shares of CAT, you would have lost $136 on the trade.

Of course, if you didn’t sell the shares you wouldn’t incur the loss right away.

This is a big reason why people will often use selling covered calls on stocks that they want to own for the long term (IE in a retirement account or just don’t ever want to sell) as it helps them generate income to offset the loss before the stocks go back up.

Scenario #3

The price of the stock increases above the strike price you sold the calls at. In this case, let’s say that the price of CAT increased to $175 at the November 13 expiration date. Here you would have collected the premium of $259 for selling the calls, but you would lose all 100 shares of the CAT stock (you would get “called out” of your position). But as the price of the shares increased, you would still gain a little from the share appreciation in the form of $105 ($170-168.95 x 100 shares).

So your total profit on the trade would be $364 and you wouldn’t own the shares of CAT any more.

You can see how your upside potential is capped.

But, you can see how you can make money using this strategy. You just want to be sure the price of a stock won’t increase much more.

Hopefully you’ve found this example helpful in your options trading education.

Just remember, it takes more money in your account in order to place covered calls. So if you’re sure a stock won’t increase or decrease in value much you could try a different options strategy like the one outlined in our “Clockwork Paycheck System” here or in the book, “How to Make Money Trading Iron Condors”  here.

And if you’re ready to take the plunge and get trading – but aren’t sure about these more complex strategies – you’re welcome to sign up for our options trade alerts through a membership in “The Empirical Collective” where we make simple, easy to follow options trades. You can get more details and sign up through the discounted link here.