THE COVERED CALL: Become the Seller
Review the Terminology Below:
⬆️ Call Options: A way to bet on a stock you think will go up in price. They give you the right to buy the stock at a set price (called the strike price). For example, if your contract lets you buy the stock for $10, and the stock later rises to $20, both the stock and your call option increase in value — meaning your option becomes more profitable.
⬇️ Put Options: A way to bet on a stock you think will go down in price. They give you the right to sell the stock at a set price. For example, if your contract lets you sell the stock for $10 and the stock later drops to $5, the stock’s value decreases, but your put option becomes more valuable — since you can still sell it for $10, your option gains profit as the stock falls.
💲Strike Price: This is the set price at which you can buy or sell the stock when using an option.
𝚫 Delta: is a number that shows how much an option’s price is expected to move for every $1 change in the underlying stock’s price. To put simply:
- For call options, delta ranges from 0 to 1. A delta of 0.50 means the option price will roughly move 50 cents for every $1 the stock moves up.
- For put options, delta ranges from 0 to -1. A delta of -0.50 means the option price will roughly move 50 cents for every $1 the stock moves down.
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. For beginners, see this detailed video explanation here.
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 strong, well-known stock that you believe will grow steadily over the next 10–20 years. A great option is SPY, which includes 500 of the largest U.S. companies. Other good choices might be Apple, Gold (GLD), or XLV(healthcare sector). If the stock pays a dividend, that’s a nice bonus—you’ll earn some extra cash every few months. If not, no worries.
*Interactive Brokers enables fractional share purchasing so you can slowly buy towards your goals
4. Start Selling Call Option Contracts
Once you own 100 shares, head to the options chain and sell one call option with 30–45 days until expiration to collect a premium. Be sure to choose a strike price higher than what you paid for the stock so you can lock in a profit if it gets assigned.
Let’s look at an example using Apple (AAPL):
Apple shares are currently trading around $269 per share (rounded for simplicity).
- Step 1: Own 100 shares of Apple at $269 each, for a total cost of $26,900.
- Step 2: Find the next monthly expiration date that’s about 30–45 days out. (Monthly expirations always fall on the third Friday of each month.)
- Step 3: Choose a call strike price—the price you’d be willing to sell your shares at—with a Delta between 0.20 and 0.30. In this example, that would be around $280.
- Step 4: Sell one call option contract at the $280 strike for the Bid price of $4.25. You can also try to place your sell order slightly higher within the bid–ask spread ($4.25–$4.40) to potentially collect a bit more premium.
Remember, each options contract is equivalent to 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.
Here’s a video of how to execute the trade on the interactive broker platform:
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.
How much can you potentially earn from this strategy?
Here’s an example:
- 100 shares of Apple = Selling 1 Call Options contract @ $4.25 = $425/mo.
- 500 shares of Apple = Selling 5 Call Options contract @ $4.25 = $2125/mo.
- 1000 shares of Apple = Selling 10 Call Options contract @ $4.25 = $4250/mo
-The Wealthy Sheep 👩🏻💻