How to Sell Covered Calls to Make More Money

The major indexes are all off to a strong start this year, with the Dow and S&P 500 higher by more than 4% and the Nasdaq higher by more than 5%.

Earnings season has minted some big winners, especially among growth stocks, but we’ve also seen promising names sell off on earnings misses.

The bull market is still in effect, but instead of the high-powered market of the last few years we’ve entered more of a rolling bull market, which leads to more muted index returns and outperformance of individual stocks and sectors.

That makes it a good time to bolster your portfolio returns with options.

If you’re long-term bullish on a position that isn’t showing a ton of momentum lately, you may want to sell covered calls to make more money on existing positions.

The risk of covered calls is sacrificing some of your upside potential to put immediate cash in your pocket, but if you’re neutral on a position in the near term, the rising levels of volatility in the market are juicing premiums for call sellers. Keep in mind, this is still a net bullish trade, so if you’re bearish on a stock, a covered call strategy isn’t ideal to repair a broken position. Cutting bait may be the better option there.

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How to Sell Covered Calls to Make Money on Stocks You Own

A covered call is a strategy that consists of owning an underlying stock and selling an option against the stock. Since a call option represents 100 shares of the underlying stock, you can sell one call against each 100 shares of stock you own. Because you own the stock, your short call position is “covered” by the stock.

A short option position by itself (without the stock) is very risky and requires a substantial margin balance.

A short call on a stock you own, on the other hand, is a very conservative strategy that requires no margin.

I would recommend a covered call options strategy against virtually any stock an investor holds. In my mind, it’s free money, and best of all, it’s a great way to start learning about options and options trading.

Let’s dive a bit deeper into how to sell covered calls with a stock that’s recently backed off its highs.

Had I bought 100 shares of Amazon (AMZN) a month ago, after 30 days I would be down 2.4%.

However, with AMZN trading at 225, if I sold a March 21, 230 call for $4.65 against my stock holding (which is actually $465), my yield could be 2.1% if AMZN trades sideways and the calls expire worthless.

If AMZN has a repeat of last month, the proceeds from the covered calls would offset the majority of the unrealized losses on the position.

The downside to this strategy is by selling a call against my stock holdings, if AMZN exploded higher, I would not participate in the large stock gains, as the buyer of the call would have exercised his right to buy the stock from me. In the case of AMZN, I would make money until the stock traded above 230; however, above 230 my profits would be capped.

The net result is that I would outperform by selling a call if AMZN closes up to 234.65 on expiration (because of the $4.65 premium received), but would underperform if AMZN traded above that.

I’d also outperform should shares fall, because the covered call would offset a portion of my losses.

This is the exact strategy we use at Cabot Profit Booster, where we sell covered calls on Mike Cintolo’s weekly Cabot Top Ten Trader stock picks, which are 10 of the week’s strongest momentum stocks. We are looking to buy the best-looking stocks, as chosen by Mike, and then sell covered calls against those stocks to rack up yields ranging from 3-20% month after month.

If those sound like the kinds of monthly returns you’d be interested in – or if you simply want to learn more about covered calls or options trading in general – click here to become a Cabot Profit Booster subscriber.

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader, Cabot Options Trader Pro, and Cabot Profit Booster. He uses calls, puts and covered calls and more to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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*This post is periodically updated to reflect market conditions.