Subscribe to InvestorTrip
Selling covered calls is one of my favorite strategies for making passive income in the stock market in just a few minutes per week.
While covered calls is a great way to make money, you need to avoid certain mistakes that could blow up your trading account or force you to give up your stock at a hefty discount.
In this guide, I’ll do my best to start from the beginning and explain everything I know about selling (writing) covered calls for passive monthly income.
You don’t have to be a stock market expert to use this strategy. It doesn’t matter how old or young you are or whether you have any prior stock market experience.
All you need is some money and an active brokerage account. But first, let’s start at the beginning and explain exactly what a covered call is.
What is a covered call?
A covered call is an options strategy where you sell a call option with the right but not the obligation to purchase shares at a specific strike price while owning the underlying shares at the same time.
Each options contract represents 100 shares and you can “Sell to Open” a covered call contract Monday through Friday during normal US stock market hours (9:30am to 4pm EST). You cannot sell covered calls during premarket or afterhours trading.
80% of options contracts expire worthless so my covered call strategy works wonders if you follow this strategy guide and know what you are doing.
I use this strategy to generate a yield from non-dividend paying stocks in my growth portfolio. Selling covered calls can make you a decent monthly income or even pay your bills if you have enough shares.
However, you need to be careful when selling covered calls because many things can go wrong and cost you a fortune (more on that later).
Selling Covered Calls (Example)
In this example, we will sell covered calls on Lucid Motors (LCID) to show you exactly how the covered call strategy works. Lucid Motors is a good stock for selling covered calls because it’s in a popular sector (EV stocks), trades on high volume, and the options chain has a lot of volatility.
Volatility is good for trading options because we want to lock in high premiums then hope and pray the covered call expires worthless so we can keep our shares plus the premium.
My covered call strategy is ultra-conservative because I like to sell out-of-the-money options at very high strike prices. While I don’t receive the biggest premiums, I rarely have to worry about getting my shares called at the same time.
I usually sell weekly call options because it’s easier to predict price movement in the short run. Many investors sell monthly call options but you can miss out on gains if major news or a positive earnings report causes the market to FOMO into your specific stock.
Monthly calls require less maintenance but I would sell at the max strike price to reduce risk.
One of the biggest mistakes I see beginners make is underestimating how much a stock can run up during a bullish movement. Here’s a Reddit WallStreetBets thread where a trader sold a call option on LCID at $30 but the stock soared much higher.
While the trader pocketed a nice premium, he left a ton of money on the table by choosing a low strike price. LCID stock soared to $45+ and his shares will get assigned at just $30. He sold his entire stake at around $31 ($30 + $1 premium) but lost $45,000 in potential profits because the options finished in the money.
That’s mistake #1: always choose a strike price far out of the money unless you don’t mind giving up your shares.
What You Need to Get Started
All you need is a nice chunk of savings and a brokerage account that allows Level 1 options trading.