How to Make Money with Covered Calls and Options Trading

Brief Description

Options trading can be an effective way to generate income, especially through covered calls. A covered call strategy allows investors to earn money on stocks they already own while still benefiting from potential price increases.

In this guide, you’ll learn:
What covered calls are and how they work
The benefits and risks of selling covered calls
Step-by-step instructions to execute a covered call trade
How to use options trading to generate consistent income

Whether you’re a beginner looking to earn passive income or an experienced trader seeking low-risk strategies, covered calls can be a great addition to your portfolio. Let’s dive in!

What Are Covered Calls?

A covered call is an options strategy where an investor sells a call option on a stock they already own. This allows them to collect premium income while keeping ownership of the stock.

How It Works

Step 1: You own shares of a stock (e.g., 100 shares of Apple – AAPL).
Step 2: You sell a call option (contract) on those shares.
Step 3: You collect a premium (income) from selling the option.
Step 4: If the stock price stays below the strike price, you keep your shares and the premium.
Step 5: If the stock rises above the strike price, your shares may be sold at the agreed-upon price.

Example:

You own 100 shares of Tesla (TSLA) at $200 per share.
You sell a call option with a strike price of $210 for a $5 premium per share.
You collect $500 ($5 x 100 shares) in premium income.
If TSLA stays below $210, you keep your shares and the $500 premium.
If TSLA rises above $210, you sell your shares at $210, but still keep the $500 premium.

Covered calls provide income even if the stock doesn’t move!

Why Use Covered Calls?

There are several benefits to using covered calls as part of your investment strategy:

Generate Extra Income – Selling covered calls earns you premium income on stocks you already own.
Lower Portfolio Risk – The premium received reduces your cost basis, protecting against small price drops.
Consistent Cash Flow – You can repeat this strategy monthly or weekly for steady income.
Outperform Buy-and-Hold Strategies – Even if the stock price stays flat, you still make money.
Works in Sideways Markets – Even if a stock doesn’t rise significantly, you still collect premiums.

Best For:

Long-term investors looking for extra income.
Dividend investors who want to boost returns.
Traders who believe a stock won’t move drastically.

Potential Risks of Covered Calls

While covered calls are a low-risk strategy, there are some downsides to consider:

Limited Upside Gains – If the stock price rises significantly, your profits are capped at the strike price.
Shares May Be Called Away – If the stock price exceeds the strike price, you must sell your shares.
Stock Can Decline in Value – If the stock drops below your cost basis, the premium received may not fully offset the loss.

Risk Management Tip:

Sell covered calls on stocks you are comfortable selling at the strike price.

Step-by-Step Guide: How to Sell Covered Calls

Step 1: Choose the Right Stock

Pick stocks that you already own (or are willing to own) with at least 100 shares.
Best for stable, blue-chip stocks like Apple (AAPL), Microsoft (MSFT), and Coca-Cola (KO).

Step 2: Select an Expiration Date

Choose a call option expiration date:
Short-term (1-4 weeks): More frequent income, but requires more active management.
Long-term (1-3 months): Less frequent income but provides more downside protection.

Step 3: Pick a Strike Price

The strike price is the price at which you agree to sell your stock.
Pick a strike price above the current market price to maximize profit.

Example:
If Apple (AAPL) is $150, you could sell a call at $160 and collect a premium.

Step 4: Sell the Call Option

Using your brokerage account, select:
The stock you own
The strike price
The expiration date
The number of contracts (1 contract = 100 shares)

Then sell the call and collect your premium!

Step 5: Wait Until Expiration

At expiration, two things can happen:
Stock stays below the strike price → You keep your shares and the premium.
Stock goes above the strike price → Your shares are sold at the strike price, but you still keep the premium.

You can repeat the process every month for passive income!

How Much Can You Earn?

If you own 100 shares of a $100 stock and sell a call for $2 per share, you earn $200 per month.
Doing this 12 times per year would generate $2,400 in income without selling your shares.
Multiply this across multiple stocks, and you can generate a full-time income.

Pro Tip: Selling covered calls on dividend stocks allows you to earn dividends + options premium for double income!

Advanced Covered Call Strategies

Once you’re comfortable with basic covered calls, you can explore advanced variations:

1. The “Poor Man’s Covered Call” (PMCC)

Great for smaller accounts
Instead of owning 100 shares, you buy a LEAPS call option (a long-term call option) as a substitute.

2. The “Wheel Strategy”

Great for generating consistent income

Step 1: Sell a cash-secured put to buy stock at a discount.
Step 2: Once assigned, sell covered calls on the stock for continuous income.
Step 3: If the stock is called away, repeat the process.

Who Should Use Covered Calls?

Covered calls are perfect for:
Long-term investors looking for extra income.
Dividend investors who want to enhance returns.
Stock owners looking to reduce portfolio risk.
Traders who expect sideways movement in stock prices.

Best for stocks that are stable or slowly rising!

Final Thoughts: Start Selling Covered Calls Today!

Covered calls are a great way to make passive income from stocks you already own.
This strategy allows you to earn steady returns with relatively low risk.
You can start small and scale up over time.

Key Takeaways:
Sell covered calls to generate monthly income.
Pick stocks that are stable and have options liquidity.
Use dividend stocks to combine dividends + options income.
Consider advanced strategies like Poor Man’s Covered Calls or The Wheel Strategy.