THE COVERED CALL
1. Open a brokerage account
Start with a TFSA and make sure to enable options trading Level 1 when you open your account. Not every bank or broker will have options trading capabilities.
2. Start transferring money to your brokerage every month
You can start with as little as $10/mo or $1000/mo, your contributions will depend on your budget.
3. Buy 100 shares of a stock
Choose a well-known stock where you can see continuous growth for the next 10-20 years. Purchasing the SPY would be the best overall recommendation as it encompasses 500 of the largest companies in the American stock market. Other examples include, Apple, Gold, Visa and XLV (pharmaceuticals). If the stock also pays a dividend, then great, you’ll collect a bit of cash every few months for owning the stock. If not, don’t worry about it.
*Interactive Brokers enables fractional share purchasing so you can still own part of the stock even if you can’t afford the whole stock all at once.
4. Sell a Call Option
Once you own 100 shares, go to the options chain and sell 1 call option with 30-45 days to expiration to collect a nice premium. Make sure the strike price is greater than what you paid for the stock. Remember, each options contract equals 100 shares. So the more shares you own, the more contracts you can sell.
*Note: Avoid trading more than once or twice per month to avoid taxation in your TFSA.
5. What happens on expiration day?
- If the stock rises above your call option strike price, then you will sell your 100 shares at the price you chose and you keep the premium you initially collected. This action is executed automatically by your broker at the time of expiration. You can go back and Repeat Step 3.
- If the stock price remains below your Call Option strike price, then repeat Step 4 and continue to collect premiums.
See my post on the Covered Call Strategy for details on how to execute this trade.
How much can you potentially earn from this strategy?
Here’s an example:
Apple is worth $222/share and selling a call option at the strike price of $230 with 45 days to expiration:
- 100 shares of Apple = Selling 1 Call Options contract @ $4.50 = $450/mo.
- 500 shares of Apple = Selling 5 Call Options contract @ $4.50 = $2250/mo.
- 1000 shares of Apple = Selling 10 Call Options contract @ $4.50 = $4500/mo.
– The Wealthy Sheep