How I Earn Monthly Income On Stocks I Own

Why I love selling covered calls for income

Welcome back to The Tobin Report, I hope everyone is having a safe Memorial Day Weekend. I’m poolside today in Palm Springs enjoying an adult libation. 🏖 🥃

Let’s get to it….

This week I wanted to share a personal income strategy I use regularly in my long term investing account. It involves receiving monthly (sometimes weekly) income on companies I already own. Not dividends. Not short selling. Very LOW risk.

It’s the Covered Call.

Selling Covered Calls for Income

Selling covered calls is nothing new and has been around a LONG time, something I learned as a licensed broker in the late 90’s and still use to this day. It’s simple, easy to execute, and great for extra income with little risk.

You can even do this in your retirement account.

So how does it work? It’s simple once you understand the concept:

1. Own 100 shares in a company

2. Sell 1 option contract, the ‘covered call’

3. Receive premium (MONEY!)

That is LITERALLY all you do.

No matter what happens, you keep the premium. And if all goes to plan, you won’t need to sell the stock. Pure income.

Worst case scenario, you sell the stock for profit (if done properly).

It’s similar to owning a rental property and receiving monthly rent checks.

🤿 Let’s dive a bit deeper…

What exactly is a covered call?

A covered call is an options trading strategy where an investor sells a call option on an asset they already own.

It involves two main components:

1. First, you must own the underlying shares: 100 shares minimum.

2. Next, you SELL a call option: This is an OPENING transaction. This call option is a contract that obligates you to sell your shares IF price reaches a pre-determined level at expiration. This also means the buyer of the contract you sold to has the right to purchase your shares at a predetermined price (strike price) within a specific time period (expiration date).

You pick the price. You pick the expiration date. Both of these affect how much premium you receive, obviously. It’s all in the ‘options chain’ (below).

Each contract represents 100 shares of the underlying stock. 5 contracts represents 500 shares…and so on. This is why you must own at least 100 shares in your account to sell 1 contract.

Let’s look at an example:

AMZN

I’ll use Amazon (AMZN) as an example. As I write this report, AMZN is trading at $120.11. Let’s assume you bought 100 shares earlier this year and paid $110/share. (or you could buy today for $120. It doesn’t change the scenario)

The next step is to sell a call option against those 100 shares you own. This is an opening transaction. You are “selling to open”. Remember, you aren’t selling the shares you own…you are selling a contract to potentially sell the shares you own.

Look at the options chain below: Calls on the left; Puts on the right; strike price in the middle. Since you are selling a call option, you focus on the left side, CALLS.

As an example, let’s choose $125 per share, red box. This is arbitrary in this example.

This means you are promising to sell your shares at $125/share IF the price is higher than $125 on June 23rd. And for this obligation, you will receive a premium of $2.20 per share, or $220, per 100 shares you hold. This is an IMMEDIATE 2% return on your initial $11,000 investment (100 shares at $110/share). This also lowers your original cost basis by $2.20.

No matter what happens, this $220 is yours. You can use it however you wish. Reinvest it. Take your spouse out to dinner. But physical silver. All are smart decisions. Lol

Now what?

Once you’ve sold the options contract and received the $220, you wait. Boring, yes. But profitable, also yes. One of two things will happen from here…

1️⃣ If on June 23rd (options expiration date for this month) the price of AMZN is over $125, then you will be obligated to sell your shares for $125/share.

OR

2️⃣ If on June 23rd the price of AMZN is less than $125 then you keep your shares.

In both examples, you still keep the $220.

Win-win.

This is a real life example of earning 2% in less than 30 days. Do this month after month, you’ll have a 24% return, or over $2,600 on an $11,000 investment.

Remember, you can select higher strike prices and be more conservative. But in that scenario, you would receive less in premium.

Of course option premiums adjust based on market conditions, both up and down.

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So what are the risks?

There are two main risks.

1. AMZN tanks and price falls.

   1. In this scenario, you already owned the shares so no added risk to this strategy. Holding shares of any stock has the same risk. You still keep the premium. You still own the shares and you can still sell more covered calls month after month and ride price movement.

2. AMZN rips to $200/share.

   1. In this scenario, you sell at $125 and keep the premium only. You miss out on the upside.

I like to sell calls month after month and ride price movement. Each month I may choose a different strike price based on where price has moved. For a stock that is sliding in price, it’s a way to continue to lower your cost basis IF you decide to continue holding the stock.

I sell covered calls on companies already in my account that are sitting there collecting dust. It’s like getting paid rent on property I own.

My preferred timing for selling calls is when the stock has recently run up in price and I believe price will pullback. Instead of actually selling the shares, I’ll sell covered calls and pick a strike price a bit higher than its current price.

Finally, there is a lot more that can be covered on this topic but I believe this is a good start. This is a perfect strategy in a retirement account where you are able to pick specific companies as opposed to a deferred comp through your employer that might limit your investing options. Of course, you have to have an account approved for Level 1 options trading. I use E*Trade.

Feel free to reach out if you want to learn more.

Email me at Eric@substack.com and I’m happy to answer your questions on this. We can even set up a call if you’d like.

I hope this was helpful.

📝 Newsletter I Still Recommend

👉 For those invested in precious metals, I highly recommend

GoldFix

written by Vince Lanci.

GoldFix Weekly: Memorial Day Special

Vince conducts extensive research on the commodities market and more specifically gold and silver. He is way smarter than me so if you are looking for a much more in depth analysis into this world, HE IS THE GUY.

He also does weekly commentary on Arcadia Economics YouTube channel.

It’s high level shit, so pay attention. He’s been in the business for awhile and knows what he’s talking about.

And lastly, if you are interested in my absolute favorite strategy for monthly income, read a report I wrote from last year…on selling puts.👇

Have a great weekend!

Eric