My goal with my different income-focused services is to help my subscribers earn more money than they would by following the old-school types of investment advice. I recommend higher yields in my Dividend Hunter service.
For my dividend growth newsletter – Monthly Dividend Multiplier, I do not settle for the 2.5% to 3% yields that you will find on most dividend growth stock lists. I see no reason not to earn 4% to 5% and still have above-average dividend growth. I follow a similar path with covered call recommendations in Weekly Income Accelerator.
I see promoted covered call trades cross my desk with return projections not much better than the 8% to 10% you could earn with my high yield Dividend Hunter picks. Why do more work to make the same money?
A couple of years ago, I launched my first covered call trading service. With covered calls, call options, you sell calls backed by owned stock shares. The call premiums and any earned dividends are yours to keep.
I’ll share a personal story but first, here is a quick and dirty on how covered calls work.
Options contracts have specified strike or exercise prices and designated expiration dates. If the stock price is above the strike price when a call option expires, the option will be exercised, and the shares called away, replaced by cash at the per-share strike price.
The returns from a covered call trade will be the value of the option premium plus the amount the strike price is above the current share price if the option expires “in-the-money.” If the stock is below the strike price (out of the money) at expiration, you retain the shares in your account, and more calls can be sold in the following weeks.
I hope you picked up a bit on how covered calls work. The strategy is not hard to use, but the learning curve can feel steep. Now I’ll get back to my personal story.
When I first started making covered call trade recommendations, my target return was 1.5% per month. So for a 60-day trade, I wanted to make 3%. One-and-a-half percent per month works out to 18% per year. I think that is an attractive target for a trading strategy where the returns primarily consist of cash from selling calls that is yours to keep.
A funny thing has happened as we close out 2020.
The market prices of options are high, very high. If you are an option seller, placing covered call trades, this is a very good thing. In the current stock and options market, it is possible to earn 2% to 3% or more per month, just from the option premium earned.
For example, I just recommended to my subscribers a covered call trade on Ford Motor Company (F). The calls expire in 39 days, and the cash return from the option premium is 5.1%. It seems a little crazy to earn 5% in just over a month on the shares of a solid company like Ford. I am not complaining.
My point is that if you do not trade options, but have heard about covered call trading, now is the time to learn how it works and start making some trades and earning real cash in your brokerage account.