Selling Covered Call Options

as a Form of Monthly Residual Income

Selling call options on stocks you buy is a fast and reliable way of generating income on a monthly basis. To sell covered calls on stocks you own, you must own a minimum of 100 shares of a given stock. Each 100 share block is called a contract.

100 shares = 1 Contract

200 shares = 2 Contracts 

1000 shares = 10 Contracts

Covered Calls work like this:

Let’s say you purchased one hundred shares of XYZ stock at $39.75. That stock is now in your possession. If you want to hold that same stock for three years you are free to do so. However, if you want to generate income from that $39.75 stock you are free to do so.

Just moments after you purchased XYZ, you decide you want to sell the stock when it reaches $40. Rather than selling the stock immediately, you could sell a call option.

Selling a call option means that you would be selling the right, not the obligation, to someone in the marketplace to buy that stock away from you at the $40 price at a later date. The buyer of the option would then pay you something called a premium. In this example, our premium is $1 per share. The price that you’ve agreed to sell the stock at is called the strike price. In this case it’s $40.

No matter what happens in this transaction, if the buyer decides to buy the stock from you or let the option expire, you get to keep the $1 premium.

The buyer of the option could choose to exercise that option at any time before the expiration date and pay you the full $40. If the buyer decides to exercise the option, you would be obligated to sell the stock to him or her at the $40 strike price and you would still get to keep the $1 premium.

Let’s look at the total profit.

Stock bought at $39.75 sold at $40 = $.25 per share profit or .62% return Plus the premium. = $1 per share or 2.5% return
Total profit on trade = $1.25 per share or 3.1% return

How To Set Up A Covered Call

in Your Trading Account

All trading accounts are different. We recommend that you use Charles Schwab as your online trading brokerage.

To set up a covered call:

1. You must purchase the stock in 100 share blocks. Each 100 share block is 1 contract.

2. Go to the option chain for the stock. You will be looking at the Call Option chain.

3. Find the Strike Price you wish to sell. Make sure you select Sell To Open, as you will be selling the call option to open the position. Select Market price, which refers to the current price in the open market.