What’s A Covered Call (And Why Would I Care)?
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.
- Pick a stock that you have (or will buy) at least 100 shares of.
- Sell an out-of-the-money call option against those shares.
- Decide whether to let the contract expire, roll it, or accept assignment.
- Repeat 1–3 ad infinitum, and spend or reinvest the profits as you go.