In the Dugout: Using Covered Calls to Increase Income

After the markets rose for a decade, bears were almost put on the endangered species list. Unfortunately, the bears have made a comeback and the markets are witnessing a bear market that a majority of investors have never been part of. Many investors have substantial holding in individual blue chip stocks. This might include AT&T, IBM, Cisco, Microsoft or numerous other well-established companies. Problem is, even the bluest of blue-chip stocks have still suffered dramatic losses during this bear market. So what is a person to do, just watch as their so-called safe stocks continue to search for lower ground? The answer is a resounding NO!

There is a way to add income to your portfolio, even though your stocks might be stagnant or heading down. What if I told you it was possible to add 5-10 percent of income to your portfolio every month with very little risk? You probably would think I was out of my mind, but it is absolutely true. Let me explain.

The way to do this is by selling someone else the right to by the shares of stock you own in your blue chip company at a specified price. For example, let's say you own 100 shares of IBM and it is selling at $100. You could sell someone else the right to buy these 100 IBM shares at $110 before a certain time in the future. This is called selling covered calls. Without getting into the technical aspect of options, that's right I said options, let's explore further this wonderful way of making additional income.

Your first question might be why would someone pay me to buy my stock at a price higher than they could just go get it in the open market? Good question. The reason is the buyer thinks the stock will trade higher than the arranged price before the expiration of the option. The key here is that options are time sensitive. This means they expire. If you sold someone the right to buy your IBM shares at $110 and they paid you a couple dollars per share in premium, you would keep the whole amount if the option expired before the stock got above $110. Are you seeing the potential of this strategy?

Before you get the idea this is a no-lose situation, let me just explain what the risks are. The biggest risk is that you might be called out, or have to sell your stock at a price lower than it is selling for. If in our example IBM does indeed trade higher than $110 by expiration, your shares would have to be sold at $110. So the difference between what you sell it for and what it currently is selling for is missed profits. But that is all you lose, missed profits. If the stock is not called out, you can keep selling options against it, which keeps adding income to your portfolio.

Using a covered call strategy in conjunction with technical analysis can provide a substantial amount of income to a persons account. The strategy is safe enough that any broker will let you do it even in an IRA account. If this is something you would like to look into further, call your broker or go to the Chicago Board of Exchange (CBOE) web site at If you have questions about this strategy, feel free to post messages on the message board to get input from our readers and myself.

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