How to Earn More from a Lazy Portfolio?

A financial advisor might be the best person to advise you on which calls to select while a comedian might advise you to sell calls at the price level where fear intersects with greed!

What You Need To Know Selling Call Options

When you sell call options against your shareholding, you need to pay attention to two big “gotchas” that may otherwise cause your trading strategy to come undone.

The biggest one is to not sell too many calls.

If you own 100 shares of stock, you should generally not sell more than 1 call contract.

Selling more call contracts would mean that you significantly increase your overall risk exposure because 1 options contract usually corresponds to 100 shares.

Just imagine what would happen if you sold lots of calls and your broker informed you that you had to sell stock to meet your obligations.

What would you do?

You would have to buy shares at whatever price they are currently trading at in the market.

And that might be quite a bit higher than the price at which you agreed to sell them, meaning you are buying high and selling lower – never a good strategy!

The second big “gotcha” is forgetting about Uncle Sam.

When your shares are sold, you have to pay capital gains taxes. And if you owned the shares for less than a year, you will pay a higher rate of taxes than if you held your shares for more than a year.

Don’t forget that Uncle Sam will get his share of your gains either way. So, if you have been holding onto your shares for many years, you may want to think twice before selling covered calls.

After all, covered calls are contracts that obligate you to sell shares if the call options are assigned, meaning if the share price rises above the call strike price.

What Brokers Facilitate Covered Call Selling?

When options trading first became popular, you had to travel far and wide to find a broker who could facilitate inexpensive covered call selling.

These days, you are spoiled for choice because transactions costs are significantly lower than just a decade ago.

Among the best options brokers are thinkorswim and tastyworks.

Both companies were influenced by renowned options trader, Tom Sosnoff. So, it’s not a surprise that they both have top notch trading platforms and a wealth of features to help make better trading decisions.

And while both are excellent solutions for active options traders, they are equally good for investors with lazy portfolios who don’t want to do anything more than sell calls from time to time against existing shareholdings.

As with any good options broker, tastyworks and thinkorswim are renowned for fast order execution and support teams who understand options strategies well. So, if you want to get adventurous and place more advanced strategies, you won’t stump either broker.

Is Selling Call Options Right For You?

If you are a hands-off investor who doesn’t want to do any work whatsoever then a robo-advisor like Betterment may be a good place to park your money.

For investors who are willing to log into a brokerage account once in a while, selling calls against a lazy portfolio of stocks or even index funds is a great way to generate some additional monthly cash flow.

If you are not convinced of the merits of the trading strategy, think about a real world analogy where you buy an investment property.

Would you buy the property and not place a tenant in it to help offset the cost of purchasing it?

Of course not, because so doing would mean relying 100% on property appreciation to make money.

Similarly, when you own stock but don’t sell calls you rely primarily on share price appreciation to profit.

Sure, you can make some extra income from dividends. But the amount and frequency of dividends is determined by the company.

By contrast, when you sell call options, the amount and frequency is largely determined by you.

Like a tenant who pays you a rent monthly, covered calls can pay you an income regularly.

Yet unlike an investment property that requires you to maintain a property, collect rent, and find new tenants from time to time, selling calls requires some stock research, a few clicks of your mouse and perhaps a call to your financial advisor.

Where else can you bank hundreds or thousands of dollars a month from an asset you already own – stocks or index funds – with little more than a few clicks?

What Is The Risk Of Covered Call Trading?

Perhaps one of the worst outcomes when you sell calls against your shareholding occurs when the stock rallies big time and you miss out on share price gains.

But even then you can still earn a profit from both the shares you own and the calls you sell against those shares.

The absolute worst thing that can happen is the stock declines all the way to zero, meaning the company, for all intents and purposes, goes bankrupt.

And even in that situation you end up better off than had you not sold call options against your shareholding because you still get to keep the premium from the calls you sold.

The bottom line is covered call trading is one of the best ways to produce extra cash flow on a lazy portfolio of stocks or index funds.

This article was republished with permission from Investor Mint.