Hey Traders and Investors, 👋
One of the key principles of building wealth is creating a consistent and reliable income stream. Traditionally, many turn to dividend-paying stocks for this, enjoying quarterly payouts while hoping for long-term capital appreciation. But what if I told you there’s a way to generate income on the stock every 45-60 days —even from stocks that don’t pay dividends—and still grow your portfolio? 🤔
Let’s dive into covered calls, a strategy I’ve used to generate, recurring income while building wealth. I’ll explain how covered calls compare to dividends, why they offer a more lucrative opportunity, and how I acquire stocks using cash-secured puts to maximize returns. 📈
What Are Covered Calls? 🤷♂️
A covered call is an options strategy where you own a stock (typically 100 shares) and sell a call option against it. By selling the call, you agree to sell your stock at a specified price (strike price) if the buyer of the call decides to exercise it. For agreeing to this, you collect a premium upfront—money in your pocket whether the stock moves or not.
Here’s a simple rundown:
You buy (or already own) 100 shares of a stock.
You sell a call option at a strike price that’s above the current stock price.
You collect a premium for selling the call.
If the stock stays below the strike price, the option expires worthless, and you keep both the stock and the premium. If the stock rises above the strike price, your shares might be called away (sold), but you still keep the premium and the profits from the stock rise.
This strategy provides income, often more than what you’d receive from quarterly dividends. 💵
Acquiring Stocks with Cash-Secured Puts 🛠️
Before selling covered calls, I often acquire shares using cash-secured puts. Here’s how it works:
1. You sell a put option at a strike price below the stock’s current price.
2. If the stock drops to or below that price, you’re assigned 100 shares at that price. Meanwhile, you’ve already collected the premium, lowering your cost basis.
3. This method lets you acquire shares at a discount so you’re getting paid to wait.
Example with NVDL 🔍
Let’s use a real-life example with NVDL, which is currently trading at $60.42 (as of Thursday, 9/26/24). This is a GraniteShares 2x Long NVDA Daily ETF, which seeks to deliver double the daily returns of NVIDIA stock.
Selling a Cash-Secured Put:
Sell the Oct 25, 2024, $57.50 put option on NVDL.
Collect $480.00 in premium per contract.
This gives you an obligation to purchase 100 shares of the stock at a net price of $52.70 if NVDL closes below $57.50 at expiration.
Effectively, you're buying the stock at a 9.11% discount, while getting paid for the risk!
Selling a Covered Call:
If you are assigned and now own NVDL shares, you can start selling far-out-of-the-money (OTM) covered calls. For example:
Sell the Dec 20, 2024, $115.00 covered call on your NVDL position.
You generate $195.00 of income.
This provides a static yield of 3.34% in 85 days (or 15.17% annualized), which is superior to NVDL’s dividend yield of 2.79%.
If NVDL closes below $115.00 on Dec 20, you keep your shares and the $195 income. There's a 93.71% probability that this will happen.
But it doesn’t stop there. When that call expires you write another covered call, giving you continuous income potential. Meanwhile, you’re still collecting dividends at the rate of Div / Yield $10.11 / 2.79%. If NVDL's price appreciates you also stand to benefit from capital gains. In other words, this strategy lets you earn in three ways:
Covered call premium: Immediate income from selling the call.
Dividends: Passive income from holding NVDL shares.
Capital appreciation: Potential for gains if NVDL’s price continues to rise.
This "triple benefit" approach maximizes your investment return by combining monthly income, dividends, and growth. Even if NVDL doesn't reach $115 in this example, you still get paid and can keep selling more calls for future premiums not to mention the premium you collected on the cash-secured put. 📊
My Take 💡
I can’t even remember the last time I bought a stock or ETF outright. All of my holdings come from getting assigned the stocks or ETFs I wanted to own anyway—and that’s how I’ve built a significant portfolio over the years. By combining cash-secured puts with covered calls, I’ve turned the market’s natural ebbs and flows into a reliable, steady income machine.
This strategy isn’t just about boosting income, though. It’s about unlocking the power of compounding. You’re not only earning from the premium and dividends but also positioning yourself for capital appreciation. When the stock or ETF rises, you still win. When it doesn’t, you’re getting paid to wait, while continuing to build wealth.
The beauty of this approach is in its consistency. Selling covered calls has allowed me to generate monthly income, reinvest profits, and grow my portfolio—all while reducing risk. Over time, it’s turned into an unstoppable force in my financial journey.
If you’re tired of relying solely on dividends or capital gains, try weaving covered calls into your strategy. Believe me—when you get this system going, you’ll be amazed at the results. And who knows? You may never feel the need to buy a stock outright again! 😉
Questions or thoughts? Let’s chat—I’m always happy to help you fine-tune your strategy! 🗣️
*Disclaimer The information in The Options Oracle is my opinion, not financial advice.
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