The Covered Call strategy is considered an income producing strategy. It is a way to potentially generate income on a monthly basis. Typically investors, who are looking for income, will buy dividend paying stocks. The problem with dividend paying stock is that you will typically be receiving dividend payouts that generate a 2-5% return per year. With covered calls, you can generate that same return or better each month.
A drawback for covered calls is that you need to have enough funds to buy a minimum of 100 shares of stock. If you were looking at doing a covered call on a $50 stock, that means a requirement of $5000. If someone is starting an account with $2000, you would only be able to do covered calls on stocks under $20, which makes it more difficult but, certainly, still possible.
One example we looked at was a buy of CHTP for $4.99 on 2/13/14. The option sold was the Feb14 6 call for $.75 which represented a 15% return. If the stock was called away, you would sell the stock for an additional $101 profit which would jump the return to 35%. The stock closed at expiration at $6.04, so there was a good chance of getting called out and, thus, generating that 35% return. If the stock was still in the account and you held on to it, today’s close was at $5.72, which still represents a 29% return. These are not annualized returns. This is a 2 week return as of today. This example didn’t include commission costs, since every broker charges different amounts.
There are 2 free sites available to find potential covered call trades, based on high paying premiums. The first site is http://coveredcalls.com/. The second site is https://www.borntosell.com/search. Watch the elective class on Covered Calls to find out more about this strategy.
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