With the covered call option strategy, I have earned extra income for over 13 years.  The covered call option strategy is one of the safest and easiest ways to make extra monthly income.  I primarily invest in dividend growth companies and ETFs that pay dividends.  If you are not familiar with dividend investments, then you may want to go back to lesson 1.  Before I get started, I just want to remind everyone that I do not offer financial advice, this an opinion blog about money. The main emphasis of this site is that you can earn easy income through dividends and safe option strategies like the covered call option.

I have been using the covered call option strategy and trading call options for over 10 years.  I typically did long-term contracts and always hoped that the contracts would expire.  I never closed a contract or rolled it.  This worked well most of the time.  Rarely did a contract get assigned.  Meaning the option owner requested the shares at the strike price and they were transferred from me to them.  However, early in 2020 before the correction this did happen more than usual.  The stocks I owned increased to new highs and several contracts were assigned at once.  This caused me to sell a lot more than I was ready to sell.  At that point, I decided to take a deeper dive into options and see what I was doing wrong.

Now after learning a lot and adopting safe strategies I realize how little I really understood about selling covered calls.  Below I will share with you what I learned and provide some guidance on how to get started.  First, let me describe what a covered call is.  When you sell a call option on a stock you own it is called a covered call.  If you do not own the stock, then it would be a naked call.  I do not invest in naked calls.  They are way too risky.  I only sell calls on stocks or ETFs that I own.  So, you can see where the “Covered” comes from.  When you sell a covered call, someone is paying you to have the opportunity to buy shares at a specific price on or before a specific expiration date.

For example, I own Coca Cola which is currently trading around $64 a share.  I am willing to sell it if I can get a 10% return.  So, if I can get it around $70 then I am willing to sell a call on it.  The buyer pays me a premium for this opportunity.  The farther you go out into the future the more premium you can pick up with a higher strike price .  Below is an example of different periods and what kind of premium you can get.  However, something to keep in mind is that if you can keep the expiration sooner you can then resell the call and gain more premium.  So, it is not always best to go further out into the future.

You can see from the spreadsheet above that the further you go out the better premium you can get.  Also, if KO is having a good day the premiums can be a lot higher.  It is hard to find good premium if you are just using the 10% rule.

I am also using Delta to judge my trades.  You can see a 10% increase for KO coincides with low Delta.  Meaning for the near-term expiration I am not taking much of a risk.  The Delta is .032 which is a 97 percent probability that the stock price will stay out of the money or lower than the strike price.  A better way to identify good contracts is to use Delta.  I use a .20 Delta which is an 80% probability that the stock price will remain out of the money.  Now if you want to take less risk then you could go with an even lower Delta.  I know of traders that are using a .10 Delta.

Options can be really confusing at first.  The best way to understand them is to get started.  I am going to walk you through selling a covered call.  You can copy this exact trade or find a company you like and use the guidelines for your own trade.  My guidelines are the following:

1. Select a security where you have at least 100 shares. Each option contract constitutes 100 shares.  So, if you want to do a trade with 2 contracts you would need 200 shares.
2. Find a strike price that is either 10% above the current stock price or has a .20 Delta or better.  In order to see the Delta you will need to view the Greeks on the option chain.  Most brokerages provide option chains.
3. Look at expirations that fall between 30 and 90 days. Its ok to go out a bit further if you need to.
4. Try to earn at least $100 of premium on the trade. It is ok to do multiple contracts to reach the $100 for a trade.  That is if you own more than a 100 shares.
5. Close or roll the option if it is near or in the money. I typically add any options contracts to my planning worksheet three weeks out from expiration.  I provide a weekly planning worksheet to my memberships early each week with all trades that I am managing.  I use color coding for any contracts that are in-the-money and at risk of being assigned.
6. A couple times a week I check the Schwab Summary page and sort all my options contracts by profitability.  If any are over 75% profitable, I look to see if I can inexpensively close them.  This way I can look at opening a new Covered Call.

With the rules above in mind I found good premium on Corning (GLW).  I found a 60-day expiration with a strike price of $43.  The Delta for the contract is .2192.  This is a little higher than the .20 that I am trying to get.  However, it is worth the risk.  It is a 78% probability instead of an 80% probability.  Each contract pays a premium of .59.  I sold two contracts so after fees I received a premium of $116.70.

Here are the steps I took to find the contract and complete the trade.   Please keep in mind this is using Charles Schwab.  The steps would be different for other brokers.

1. From my broker positions page, I simply clicked on the GLW symbol.
2. I clicked on Options on the tab menu.
3. I expanded the options chain to show the expirations that I wanted to see.
4. I changed the option chain to include Greeks.
5. I identified the contracts that were near a .20 Delta for each of the expirations.
6. I clicked on Trade for the option I wanted.
7. I entered the “Sell to Open”, the number of contracts and selected market trade.
8. I verified my selections on the trade screen and then clicked the Review Order button.
9. I checked everything to be sure the order was correct and then clicked submit to process the order.
10. Since this is a market order, I get an immediate order status that showed that it was processed.

This took all of 15 minutes to research and place the order.  So, for 15 minutes of work, I made $116.70.  I try to replicate a covered call for any positions where I have more than 100 shares.  I have several hundred shares of GLW, INTL, KO, O, PG, DVY, IJH and SDY. I have been able to earn close to 1k monthly on Covered Calls.  I made this trade back in February 2021.  Since then, I have rolled it numerous times increasing the strike price and extending the expiration.

Back in 2021, the first roll I made .68 per contract for a total of $133.  The second roll I made .8 for each contract and $157 for the trade.  I spent about 10 minutes on each of the rolls.  Since I am only looking for improving the trade and earning more premium, I find rolling trades is easier to deal with.  So, for a total of 35 minutes, I made $406.  I will discuss rolling trades in more detail in the next couple of lessons.

I also have a video showing how to sell a covered call on YouTube.  You can find it below.  My next Lesson will discuss another safe options strategy of selling Cash Secured Puts.  You can access it here.

Thanks for taking the time to read Lesson2!

Uncle Jim