Covered Call example with a dividend stock for a weekly income

Updated: 16 March, 2022 seen 38

Investing with covered calls is one of my most favorited income-generating strategies. Not always works as expected but at least the sleep at night is healthier than chasing after high yield or trading futures with margin. lol. 

In today's article, I will share one example of how I'm actually generating weekly/biweekly/monthly income from selling covered calls on Dow inc dividend stock.  

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Before we get started, here is a brief summary of what is a covered call

covered call refers to a transaction in the financial market in which the investor selling call options owns the equivalent amount of the underlying security. To execute this an investor holding a long position in an asset then writes (sells) call options on that same asset to generate an income stream. The investor's long position in the asset is the "cover" because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. If the investor simultaneously buys a stock and writes call options against that stock position, it is known as a "buy-write" transaction.

This is not trading advice. Investments in stocks, funds, bonds, or cryptos are risk investments and you could lose some or all of your money. Do your due diligence before investing in any kind of asset.

Generate weekly income selling covered calls on Dow inc (NYSE: DOW) stock

DOW stock price as of March 15, 2022

On March 15, 2022 you could buy 100 shares of Dow inc stock spending $5,887 and simultaneously sell out of the money March 25 expiry covered call with strike price of $60 for about $1.10. That gets you $110 and makes about 1.86% return in about 10 days. Break-even: $57.77

If DOW stock closes below $60 on March 25, you keep the premium and start over. If the stock closes above $60, your stock gets called away, but check your break-even points.

There are several options you could use not to get shares called away, like a roll-up or roll forward. Or you could sell the stock, and start over by writing cash-secured put.

In case your stock gets called away at $60, remember you have made a premium + value gain. -$5,887+$6,000+$100= +$223. That would be about 3.78% yield on your initial investment in about 10 days.

Remember, you are selling one contract, 100 shares of DOW stock, make sure you have 100 shares to sell if called away.

Additionally, Dow inc is paying an annual dividend of $2.8.

If there is a lesson I have learned during my short investor's career - investing with covered calls on stable dividend-paying companies is one of the safest. Not safe, but one of the safest.

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