Covered Call Income Strategy
Writing covered call options is a method to earn additional income utilizing stocks you already own in your portfolio. For example, say you own 100 shares of company XYZ which you purchased for $45 per share. In January you think the stock won’t go up much so you write a call option expiring in 120 days with a strike price of $55 for a fee of $2 per share less a commission of $10. You would therefore collect $190 (100 shares x $2 per share - $10.00 commission) at the time of writing the option.
If the stock price remains below $55 you would keep both the $190 and your stocks, but if the stock rises above $55 within 120 days the stock option could be exercised meaning you would have to sell your 100 shares for $55 per share potentially leaving profits on the table. Regardless you would keep the $190 option premium.
It is important to note that unlike buying options when writing options the odds are generally in your favor and the vast majority of options expire worthless. This is because when selling an option you are guessing where you think the market won’t go as opposed to where it will go. Prior studies indicate that approximately 80 percent of options expire worthless. Done correctly this strategy can easily add 5 percent to your annual investment returns.