You’ve probably already heard me say that dividends are a great passive income source. However, did you know there’s another way to make money off of equities just for simply being the owner?
This can be done through a particular type of option called a covered call. For those who don’t know, options are simply contracts that give buyers the right (but not the obligation) to buy a seller’s equities at a particular price (called the strike price). In exchange, the buyer pays the seller a fee or premium. These contracts are time sensitive and generally only last between one to four weeks.
In particular with covered call options, you only have to sell your equities at the strike price if the market goes up. This puts you in a very unique and lucrative position.
For example, let’s say you own 100 shares of stock that you bought for $20 per share. You decide to sell a covered call with a strike price of $22 for a premium of $0.20 per share that expires in 30 days. This means one of three things will happen:
- The share price goes above $22. You get both the premium from the option and the capital gains from having to sell the stock ($22 minus $20).
- The share price stays between $20 and $22. In this case, the option would expire worthless. You’d get to keep the premium and do not have to sell your stocks.
- The share price dips below $20. Again, the option would expire worthless, you’d get the premium, and you wouldn’t have to sell your shares. Of course, you’d now want to wait until the market recovers so that you don’t have to take a loss.
As you can see from these three possibilities, the outcome is that:
- You’ll always earn a premium from the options contract
- You might potentially lock in a capital gain if you’re forced to sell your shares
The best part is that every time the covered call expires, you can rinse and repeat. This gives you the chance to potentially collect options premiums several times throughout the year – in addition to dividends and capital gains!
Financial redundancy is such an important thing to have when it comes to anything income. Even if you have your own nurse practitioner business, I would still encourage you to have other investments, like equities, dividends, and even real estate. Using a cover call strategy gives you another alternative for creating an additional income stream.