Options Article

Is it Feasible to Make Regular Income Trading Covered Calls?

Last Updated: September 29, 2020

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Key Takeaways

Is it Feasible to Make Regular Income Trading Covered Calls?

Yes, it is possible to earn regular and consistent income trading covered calls.This presumes that you understand the nature of investment risk, that is the possibility that you can lose 100% of the capital invested in a securities transaction and with covered calls, and the risk of having to sell the protected stock at a price lower than what you would expect.

Covered call writing is a neutral to slightly bullish options trading position. It is widely used as a strategy to provide you with additional income to protect the position or accent yields, under the belief that the market price of the underlying asset will move very little, if at all. So making regular income trading covered calls is really the point of this type of trading and the premium collected over the long-term can significantly reduce the cost basis of the position and accent the overall returns on a stock position.

Let’s say you own 100 shares of Alcoa Corporation, ticker symbol AA. You are bullish on AA, but you have noticed that the market price of the stock has been stuck in neutral for some time. Since you aren’t benefiting from capital appreciation of the asset, you turn to selling 1 AA CALL with a near end of the month expiration in order to capture some quick income.

It’s not a bad play. In fact, say you sold the call for $3, you are now sitting on $300 (before commissions) that represents the maximum gain for this position. As long as AA does not rise above the difference between the stock price and premium received (breakeven), you bank the $300. Your risk exposure is that if the stock price goes up beyond the breakeven, you will be exercised against, forcing you to sell the stock at the lower strike price and missing out on the appreciation (less the premium you did receive).

Why Consider Covered Call Writing?

It is generally considered one of the safest options trades in terms of risk, since you already own the stock. Missing out on further gains if you were to have the stock ‘called away’ is the only true pain you will suffer writing covered calls.

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Of course, the stock that you are holding could also significantly decrease in value. You would be looking at a large loss in this case despite the covered call position. However, it is important to point out that your loss would be less than holding the stock outright as the premium collected from the sale of the call would offset losses you would see on the stock position.

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