INVESTING

What’s A Covered Call (And Why Would I Care)?

A simple way to get the cash flow you want from the stocks you have.

Erik Bassett
8 min readJun 24, 2021

--

Photo by Michael Longmire on Unsplash

I like dividends. A lot.

And odds are you do, too.

It’s a beautiful thing to collect “thank-you” checks just for believing in a business. That’s about as passive as it gets.

The thing is, really passive income usually means really low returns…at least at first. Sure, they’ll snowball into something massive over a few decades, but that’s a long time.

You might want to cover your bills, your rent/mortgage, even your entire lifestyle with dividends long before you’re old(er) and gray(er).

You know, enjoy the cash flow while you’re still young enough to. Now there’s a novel idea!

For years, I thought the only way to expedite the process was to take on riskier and riskier investments. And there’s no harm in doing that with a tiny piece of your portfolio — an amount that wouldn’t really hurt to lose — but speaking as a husband and father, making huge bets with serious downside is out of the question.

Besides, even growth stocks have flat spells. Solid, undervalued businesses may go nowhere for months. I wanted to coax at least some returns out of them, if only to reinvest while prices remain low.

So I figured I was back to square one: blue-chip dividend stocks and a few lucky growth and value plays. They’re hard to go wrong with, on average, but they take their sweet time to cover even a frugal lifestyle. Again, taking on a bunch of risk was simply not an option.

But then I learned about something that significantly changed my financial outlook: covered calls.

Or, as I’ve come to call it, a DIY dividend.

It’s a beautifully simple and beautifully boring method.

  1. Pick a stock that you have (or will buy) at least 100 shares of.
  2. Sell an out-of-the-money call option against those shares.
  3. Decide whether to let the contract expire, roll it, or accept assignment.
  4. Repeat 1–3 ad infinitum, and spend or reinvest the profits as you go.

--

--