Skip to content

How To Use Covered Call Options To Generate Consistent Monthly Income in 2023

With the market now moving in a rather sideways trend, investors are wondering should they start trading to lock in the gains from the top and bottom or should they just hold tight and wait. With covered call options, an investor can adopt the Double Income Covered Call Strategy to generate a consistent stream of monthly income. In this article, I will be explaining how to use this strategy as well as the potential risks you might take on.

If you want to maximize profits in 2024 and prepare your portfolio for any possible volatility, check out my Premium Subscription! Get access to my personal watchlists, trades I'm excecuting as well as market updates almost every day! To kick off the new year, we will be offering trials for a limited time only. Contact me here to find out more.

What Are Covered Call Options

To understand and apply this strategy, you must first understand what is a Covered Call. A covered call is when an investor is selling call options while owning an equivalent amount of the underlying security. To execute this, an investor holding a long position in a stock then writes (sells) call options on that same asset to generate an income stream through the premiums collected. The investor’s long position in the stock is the “cover” because it means the seller can deliver the shares if the buyer of the call option chooses to exercise.

Read More: Understanding 2 Important Options Strategies For Beginners (Sell Covered Calls)

Generate Monthly Income With Your Long Term Positions Through Covered Call Options | What Are Covered Call Options
Covered Call. Image by Julie Bang © Investopedia 2019

Double Income Covered Call Strategy

Now that you understand what is a covered call option and how it works, you can start using the Double Income Covered Call Strategy. Let’s start off with the requirements for applying this strategy.

Requirements

To execute the strategy, here are the 2 simple requirements:

  1. At least 100 shares of a stock
  2. Expect the stock to move sideways in the short term

Execution and Explanation

Once you have chosen the stock you want to perform the strategy on, you can start looking at which specific option to sell the covered calls with. You ideally want to find options that fulfill these criteria:

  1. 30-45 Days to Expiry (DTE) as it offers a good premium as time decay states to accelerate
  2. Strike Price above Average Cost Price
  3. Fairly Out of the Money (OTM)

So how does this strategy work? Let’s assume you have 100 shares of AAPL with an average cost of $120 per share. You will first look for options expiring in 30-45 days. You will then look at selling covered call options that are around 5-10 spreads above the current price ($130) as they offer a relatively attractive premium while giving you good odds that the share price will not cross the strike price.

Let’s say you think the share price won’t go higher than $140, you will then sell covered call options with the $140 strike price. Based on the current option chain, you will receive $ in premiums. This acts as your first stream of income.

When To Close

After you have sold/written your covered call options, you have 2 options, to close the options early and lock in gains or to hold it into expiry. Doing the former will allow you to lock in early gains but there is a low chance of you securing maximum profit as compared to the latter which almost guarantees you near-maximum profit but you do run the risk of making a loss should the share price go against your favor during the last few days before expiry.

If Your Covered Call Gets Assigned

In the best-case scenario, your covered call options will almost never get assigned but, of course, the market is always unpredictable. This is why, in this strategy, you always set your covered call options at strike prices above your average cost. This way, if you do get assigned, you still get to lock in some capital gains, which acts as your second stream of income in this strategy.

Risks

This strategy sounds perfect in theory but, as with every single option strategy, there will always be risks. Here are 2 key risks that you may face when applying this strategy.

When The Share Price Goes Up Substantially

When the share price goes up substantially, you don’t lose money per se but rather, you cannot enjoy the full upside of the price movement. As you know, your maximum profit is capped at the amount of premiums you received.

As such, if the share price goes way above your strike price, your maximum profit is equal to the difference between the strike price and your average cost price plus the premiums you received.

Therefore, if an investor has a rather bullish view on the short term, you are better off with simply buying calls or holding the shares directly.

When The Share Price Goes Down Substantially

Similarly, when the share price goes down substantially, you don’t lose money per se but rather, you might face unrealized losses that might be bigger than the premiums you received.

As such, if the share price goes way below your average cost per share, you get to keep the maximum profit which can be used to offset your losses because it goes into lowering your average cost per share.

Therefore, if an investor has a rather bearish view on the short term, you are better off with simply buying puts or selling the shares directly and applying a different options strategy to maintain a long-term bullish view.

Final Thoughts

All in all, the Double Income Covered Call Strategy, is perfect for a sideways market like what we are facing right now because it allows you to collect a consistent stream of income almost every month. Although the strategy sounds perfect in theory, investors must exercise caution and understand when it is best to apply this strategy to maximize your profits while minimizing your risk.

As always, you can take a look at my portfolio updates to see my current positions! P.S. I’m running a telegram chat group for you guys to share and discuss investment-related topics so come on in! I’ll be there too! You can join the chat here: https://t.me/+Qe-eykvtbEowNDM1

Are you new to the stock market and don’t know what you should do to avoid losing half your portfolio through bad picks? Or perhaps you are an experienced investor/trader looking for fantastic opportunities and picks in the market that you might have missed out on?

If so, look no further because I am running a Premium Subscription that offers services such as:

  1. Access to both my Singapore and US Tech Watchlist with Preferred Entry Prices
  2. Telegram Group Invitation Where I Share Market Updates and My Personal Views
  3. Monthly Tradable Opportunities with Trade Setups
  4. On-Demand In-Depth Fundamental and Technical Analysis on Any Stock of Your Choosing
  5. Coverage on Several Basic and Advanced Options Strategies

Affiliate Links and Reviews

Brokerage

Tiger Brokers: Referral code SGSTOCKM or (https://www.itiger.com/sg/marketing/SGSTOCKM?lang=en_US&invite=SGSTOCKM)
Tiger Brokers CBA: Referral code SGSTOCKM or (https://www.itiger.com/sg/marketing/SGSTOCKMCBA?lang=en_US&invite=SGSTOCKM)
uSMART: Referral code nylw5n or (https://m.usmartsg.com/promo/overseas/sg-register.html?langType=3&HCode=nylw5n#/marketing-register)

Investment Tools

StocksCafe: Looking For An Online Portfolio Tracker? Use StocksCafe!

Leave a Reply

Your email address will not be published. Required fields are marked *