Covered call writing is a low-risk cash-flow strategy that can also create the potential of a 2nd income stream when using out-of-the-money (OTM) strikes which can also produce potential income from share appreciation. When incorporating underlying securities that offer dividend distributions, we now have a strategy with 3-income potential sources: option premium, share appreciation and dividend distribution.
- Purchase top-performing blue chip stocks
- Re-evaluate bullish assumption monthly (or weekly)
- Capture quarterly corporate dividends
- Sell out-of-the-money covered calls
–Share appreciation potential
- 3 potential income streams per stock
Stock selection (BCI Blue Chip Report as an example)
- The red and blue arrows show these securities outperforming the S&P 500 over past 1- and 3-month time-frames
- The purple arrow shows the dividend annual yield
- The green circle shows key dates to avoid, earnings and ex-dividend dates
30-day initial time-value returns with upside potential when using OTM call strikes
- The initial time value 30-day returns range from 1.56% to 2.14%
- Annualized returns range from 19.00% to 26.02%
- Upside share appreciation potential ranges from 1.75% to 3.67%
- These calculations do not include the dividend yield aspect of this 3-income strategy
Dates to avoid
- Earnings reports: Okay to own the stock through the report and write the call after the report passes
- Ex-dividend dates: Do not have an option in place that expires after the ex-date. Ex-dates are the most common reason for early exercise
- Use weekly options (when available) to circumnavigate around earnings and ex-dividend dates
Covered call writing using OTM strikes on dividend-bearing stocks is a reasonable approach to developing portfolios with 3-income stream per trade potential. This article featured using the best-performing Dow 30 stocks with OTM monthly call strikes, one of many ways to structure such portfolios.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
I used the CEO strategy for the April contracts with fantastic results. A total of $3364 in profits for the month! I could have done better but I decided to go with mostly ITM calls for some downside protection.
This is a fantastic strategy as it really simplifies the setups as well as the exit strategies.
1. Orlando Money Show Live Event
45-minute workshop: Monday October 30th 2:10 PM ET – 2:55 PM ET
Selling Cash-Secured Puts and Strategy Choices After Exercise
2-hour Master’s Class: Tuesday October 31st 9:30 AM ET – 11:30 AM ET
How to Master Covered Call Writing:
A detailed start-to-finish analysis using real-life examples.
2. AAII Orange County, California Chapter
Saturday November 11, 2023
Details to follow.