Selling Covered Calls for Monthly Income - Here's How I Do It - YouTube

are you thinking of selling covered  calls for weekly or monthly income  

if so you came to the right place in this video  i'm going to talk about selling covered calls what  

call options are what you need to know how  they work and the steps i use to sell them  

also i'm going to show the one thing that  you must avoid when selling covered calls i  

promise if you skip through it it could  put you in a rough spot so stay tuned  

also i'm going to give you a bonus i'm going  to explain an advanced way of selling covered  

calls if you don't already own the stock now  before i get into it i want you to know that  

i am not an investment banker a financial advisor  an accountant or in any way licensed to provide  

financial or investment advice actually i'm just  a high school dropout who learned how to save and  

invest in businesses and eventually retire from a  day job at 35 years old that was seven years ago  

so everything that i talk about in this video  is for entertainment purposes only because like  

i always say invest with a trusted investment  advisor but at least by the end of the video  

you'll have another way to earn additional  weekly or monthly income by selling covered calls  

and then you can discuss the method with your  investment advisor to see if the plan is right for  

you now if you're new to the channel my name is  rick orford author of the financially independent  

millennial and if you like videos about investing  or making money or even retiring early now is  

a great time to go ahead and hit the subscribe  button that way you'll never miss one of my videos  

oh and before i forget this video is brought to  you by thefinanciallyindependentmillennial.com  

it's my blog where you can learn to save  

invest and become financially  independent and retire early

now you might be wondering what the heck do i know  about selling covered calls well i've been active  

buying and selling stocks and options for nearly  20 years and you know buying and selling stocks  

can be complicated enough and selling options is a  strategy that investment bankers typically use or  

those who are super savvy but it doesn't have to  be that way now you might have heard of selling  

put options if you haven't or want to know more  here's a video to learn more about it selling  

put options can be an easy way to to make money  when the markets are going up but there's risks  

on the other hand i think selling covered  calls could be one of the safest ways to invest  

but in order to be successful with any investment  strategy you have to understand the mechanics  

and i'll go over all of it today first  it's essential to know what an option is  

an option is a contract between a buyer  and a seller that specifies four things  

rights and obligations the underlying security or  commodity the expiration date and the strike price  

and with a call option the seller  sells the option contract to a buyer  

and the call option buyer gets the right  but not an obligation to buy an equity or  

a commodity from the option seller within  a specific time period and at a set price  

in other words the person who sells the call  call option may be required to sell something  

to the buyer at a specific price should the buyer  decide at any point before the expiration date  

the covered portion of the covered call simply  means that the call seller already owns the equity  

that he or she is selling the call option on  

let's take an example of jimmy sally and a pound  of coffee beans well let's say today coffee beans  

are worth ten dollars a pound and jimmy has  a warehouse full of coffee beans and wants to  

sell someone the option to buy a hundred pounds of  coffee beans in one month for ten dollars a pound  

you see jimmy thinks the price of beans will be  about the same or lower next month than they are  

today on the other hand sally thinks the price of  coffee beans will likely go up in the next month  

so sally enters into a contract with jimmy to  potentially buy a hundred pounds of his beans  

in one month for ten dollars a pound in return  sally pays jimmy a fee for this contract  

sally and jimmy negotiate a fee of  a dollar a pound for this option  

and the one dollar is the option income that  jimmy gets to keep no matter how much the price  

of beans go up or down in value and since the  contract is for a hundred pounds jimmy gets a  

hundred dollars and he gets to keep it no matter  what fast forward next month let's say beans cost  

fourteen dollars a pound well sally will for sure  buy the beans from jimmy for ten dollars a pound  

as contracted otherwise if the beans cost less  than 10 a pound her option contract is worthless  

whatever happens jimmy gets to  keep his hundred dollars of income  

from selling the call option so who would you  rather be jimmy or sally or are you confused  

if you are i can't say i blame you look to sell  a covered call option you need to first own the  

underlying equity and since each call option  allows the buyer to buy a hundred shares of  

the underlying equity you'll need a hundred shares  times the number of call options in your account  

for example if you want to sell one  covered call option on the s p 500 index  

let's say the spy you'll need to have 100 shares  of the spy in your brokerage account and if you  

wanted to sell five covered call options  you'll need to have 500 shares of the spy  

in your brokerage account if you want to  sell a covered call on the spy but don't have  

enough or don't want to own the spy well then  this would be called selling a naked call option  

and this covers carries unlimited risk it's  so risky i'm not even going to get into it  

now in case you're wondering you can earn anywhere  between one and five percent selling covered calls  

how much you earn depends on how  volatile the stock market currently is  

the strike price and the expiration date in  general the more volatile the markets are the  

higher the monthly income you'll earn selling  covered calls and when the markets are calmer  

you'll have to sell calls a little further out  i prefer selling covered calls out of the money  

with an expiration date of about three to  six weeks out out of the money simply means  

that the strike price is above the  current selling price of the equity  

the strategy might limit my income a little  bit but it prevents me from having to sell my  

stock because if i did it would limit the  potential growth of the underlying equity  

and that's the only risk in selling covered calls  you may lose out on some potential upside let's  

look at the following covered call example on the  spy let's say that as of today the s p 500 etf or  

the spy is trading at 316 dollars to 320 call  option expiring next month is currently being  

bought for two dollars well what does that mean  well if you own a hundred shares of spy you can  

sell one covered call option and generate two  hundred dollars in income that's yours to keep  

best yet when selling covered calls you can  sell one contract for every 100 shares of the  

underlying security that you already own so let's  fast forward a month one of two things will happen  

remember you sold an spy call option at a 320  strike price well in a month if the spy trades  

for more than 320 dollars your contract will be  exercised yes you'll be obligated to sell your  

shares for three hundred and twenty dollars is  this bad well consider that you bought the spy  

for 316 and you sell it for 320 you made a dollar  profit per share on spy so four hundred dollars  

and you collected the two hundred dollars  in of income so your profit is 600 bucks  

you may have lost out on a little potential profit  but the income the option premium is yours to keep  

as is the capital gain from selling the shares  now if the spy was trading less than 300  

320 at expiration well the option expires  worthless you keep your 200 of income from  

selling the covered call option and you can  then sell another one if you choose now you  

might be wondering if you can lose money selling  covered calls well you'll never lose the income  

from selling the covered call the income you  receive from selling covered calls is guaranteed  

but if you sell the equity the stock for less  than what you paid then yes you'll incur a loss  

so just like having a home budget where you track  your income and expenses it's essential for you to  

keep track of your profit and loss on your covered  call strategy now remember i was telling you about  

a bonus well here we are for the bonus i'm going  to talk about a poor man's covered call now you  

might like the idea of selling covered calls but  don't have a hundred shares or thirty thousand  

dollars worth of spy or maybe you wanna sell  a covered call on something that you don't own  

if so you can consider a poor man's covered call  and here's how it works remember when you sell a  

covered call the call option is covered by the  underlying stocks and etfs that you already own  

with a poor man's covered call you don't  actually need to own the stock instead  

you'll need to replace the stock with something  else here's how it's called a vertical spread  

with a vertical spread you sell a call option and  then buy another call further out of the money  

with this same expiration and underlying equity  for example if we take from the example above  

or from before the spy is trading at 316 and the  320 call option expiring next month is selling for  

two dollars the 322 dollar call option is selling  for a dollar well in this case let's say you don't  

own or want to own thirty one thousand six hundred  dollars of spy then for example you could sell the  

three hundred and twenty dollar spy call option  and collect an income of two hundred dollars  

and at the same time you can buy the 322 dollar  call option for a hundred dollars leaving you  

with a hundred dollars of profit the call option  with the higher strike price becomes the covered  

portion and with a poor man's covered call your  risk is the difference between the strike prices  

minus the income so in this case the worst case  scenario that you could lose is a hundred dollars  

here's what could happen for example on  expiration day if spy is selling above 320  

you'll get exercised and you'll be forced to  sell spy at 320 now if it's selling above 322  

your call option that you become that you bought  becomes profitable and then limits any further  

risk so your risk is two dollars less the one  dollar of income you earned so one dollar times  

100 shares 100 bucks and of course at expiration  if spy trades for less than 300 320 dollars well  

your options expire worthless and you get to keep  all of the money and potentially repeat the trade  

cool huh guys if you have a portfolio of stocks  selling covered calls on them can be an excellent  

way to generate additional monthly income and  remember the risk in selling covered calls  

is that you might lose some potential lift in  the equity so for that reason you'll want to  

adjust the strike price to a point where  you'd be comfortable to sell your stock  

i hope you enjoyed this video and look forward  to seeing you again in the future see you guys