From time to time, I’ll be inviting other creators to share posts on their unique strategies. Chris, aka BusinessFamous, is one of the funniest and knowledgeable people on dividend Twitter. He’s worth a follow on merit. But he’s also written a guide on covered calls.
I sold my first covered call in my early twenties under the advisement of my stock broker. It was very cool. It was my money making money without taking much risk. But if you add the concept of dividend stocks earning you income twice, first on dividends and then again on option premium, well that’s definitely got my attention!
Without further adieu, here’s Chris:
Turbocharging your Dividend Growth
You’re a Dividend Growth Investor. You love compound interest. You’re comfortable buying a 3% yielding dividend stock today, so you can watch the dividends increase, reinvest, and compound over time.
What if there was a way to use your current stock positions to generate extra cash? You could then use this extra cash to reinvest more and speed up the compounding process.
Let’s talk about stock options – wait don’t click away yet!
When most people think of stock options, they think of risky bets that keep you up at night. But there are some stock options that can be very conservative, and a great way to generate cash from stocks you already own!
This article is about a type of stock option named Covered Calls, which is perfect to use in your dividend portfolio. When you sell a Covered Call option, you’re selling the option for someone else to buy your shares at a higher price. In return, the buyer pays you a cash premium. You receive this cash payment in your account as soon as you sell the Call contract – it’s your money to keep!
What you need:
- 100 shares of a stock that is not too volatile
- Being comfortable selling those shares (if necessary)
- A brokerage account with Options enabled
- Desire to make extra money
You own 100 shares of MSFT. The share prices don’t swing wildly – they usually stay in a range and you don’t expect them to spike upwards in the near future.
MSFT is $215 per share today. In your estimation, there’s no way it will hit $240 in 30 days. Someone in the market is willing to pay you around $42.00 for the right to buy your shares at $240 in the next 30 days
When you sell the Covered Call option, this $42.00 is known as the premium, and it is deposited in your brokerage account as cash!
Covered Calls Summarized
You’re taking a very low risk bet that MSFT won’t shoot up to $240 in the next 30 days. Except you’re not the gambler, you’re the Casino! You pick the strike price you’re comfortable with. You pick the length of the option. You manage the risk you’re willing to take, all while earning extra cash.
The $42 premium doesn’t sound like a lot – but the magic is that you can repeat this process every month – and earn an extra $500 per year.
The premiums change based on strike price and expiration dates, so you might earn more or might earn less in premiums, depending on how much you want to risk having to sell your shares to the option buyer. If you wanted to be more conservative in our MSFT example above, you could pick a higher strike price of say, $250 – but the option premium might be around $25 instead of $42. You can tailor your approach and risk level.
Learn More about Earning Covered Call Income on your Dividend Stocks
Turbocharge Your Dividends is a short but thorough ebook that gives you all the ins and outs of selling Covered Calls. It’s a small investment that can easily pay for itself with one option contract!