NEW YORK (TheStreet) -- I wrote an article for TheStreet on Tuesday detailing how investors can make sensible options trades to maximize the income out of dividend-paying and non-dividend-paying stocks. I acknowledged one of the major risks associated with writing covered calls was losing your shares.
When you write a covered call, you sell one call option for every 100 shares of a stock that you own. You can also execute a buy-write to establish a covered call. This simply means you open the long stock and short option leg of the trade at the same time in one transaction. In either case, you collect the premium, as a credit to your account, of the call you opted to sell. You keep that income no matter what happens. If the price of the stock moves past the strike price of the call you sold, you could have your shares called away by the party that is long the call you are short.
This all becomes clear as we look at an example.
Apple is an excellent stock to illustrate this strategy. If you own at least 100 shares of AAPL, you can generate some serious income from the position. Too many investors overlook the potential of this relatively simple method.Prior to Apple's dazzling report on Tuesday, you might have decided to hedge your position just a bit by selling a covered call. On weakness in a long position, this is usually a sensible move. Like a dividend, covered call income helps offset any underperformance in the stock. With AAPL trading around $560 on Tuesday, you could have sold the AAPL May $600 call and collected about $9.90. That's $990 that you keep no matter what happens. 10 Stocks That Fidelity Funds Are Buying >> Imagine repeating that process on a monthly basis. That's an excellent supplemental income. For some, it represents a second income. For others, it could become the primary source. I know several folks with relatively large positions in AAPL who literally live off of covered call income, just as some investors pay expenses and such using dividends.