24 April, 2023 seen 29Covered call writing is a popular investment strategy used by many investors to generate income on their existing stock…
I have been trading options for more than 2 years now, and selling covered calls is one of my most favorite income-generating techniques.
In today's article, I'm going to try to answer on question - How to make $100 monthly by selling covered calls
But before that, let's answer on the question What Is a Covered Call?
A covered call refers to a financial transaction in which the investor selling call options owns an 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.
From my side, I would like to add, that the covered call strategy will work best on stable, predictable. preferably dividend aristocrat stock.
Disclosure: I'm not a financial advisor and I don't give you any advice here, I'm just sharing my own experience. 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.
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Right, now when we have some basic understanding what a covered call is, let me show you some example
Generate monthly income selling covered calls on Exxon Mobil Corporation (NYSE:XOM) stock
Exxon Mobil Corporation, stylized as ExxonMobil, is an American multinational oil and gas corporation headquartered in Irving, Texas. It is the largest direct descendant of John D. Rockefeller's Standard Oil, and was formed on November 30, 1999, by the merger of Exxon and Mobil.
XOM is part from the S&P 500 index.
On August 17, 2021 you could buy 100 shares of XOM stock spending $5,594, and simultaneously sell out of the money September 3 expiry covered call with a strike price of $56 for about $1.21. That gets you $121 and makes about 2.16% return in about 17 days. Break-even: $54.73
If XOM stock closes below $56 on September 03, you keep the premium and start over. If the stock closes above $56, your stock gets called away, and you realize your gains.
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 $56 remember you have made a premium + value gain. -$5,594+$5,600+$121= +$127. That would be about a 2.22% yield on your initial investment in about 17 days.
Remember, you are selling one contract, 100 shares of XOM stock, make sure you have 100 shares to sell if called away.
Here you go jsut one example on how you theoretically could earn even more than $100/mo by selling covered calls on XOM stock