Overview

How can you boost your income using a Covered Call options strategy? In the dynamic world of investing, seizing opportunities for substantial gains requires strategic thinking and a keen understanding of market dynamics. Recently, I embarked on a journey that exemplifies this approach, and the results were impressive, even though it is early days. On November 2, 2023, I purchased 100 shares of Tesla at an auspicious price of $213.67 and promptly executed a covered call option, setting a strike price of $225 with an expiration date of November 10, 2023. The premium received for this transaction was a promising $2.20 per share. Now, let’s delve into the intricacies of this trade and uncover how covered call options can be a game-changer in your investment arsenal.

Explanation of the Covered Call options Strategy

The Covered Call options strategy serves as a powerful tool in an investor’s toolkit, allowing for a unique blend of income generation and risk management. This strategy involves owning a stock (in this case, Tesla) and simultaneously selling a call option against it. The call option grants the buyer the right to purchase the stock at a predetermined price (the strike price) within a specified time frame. By executing a covered call, the investor (option seller) receives a premium for selling this right, effectively generating additional income. It is a proven way to generate additional income using the covered call strategy.

covered call options strategy

covered call options strategy diagram

Personal Experience and Insights:

In this instance, the decision to execute a covered call option on Tesla was rooted in a thorough analysis of market conditions, understanding the stock’s potential and closely following this stock through its most recent earnings. Tesla, a pioneer in the electric vehicle industry, exhibited strong underlying fundamentals, making it an appealing choice for this strategy. However, the Tesla stock is not for the feint hearted, as it can be quite volatile. The strike price of $225 was selected strategically, providing a balance between potential profit and risk. Additionally, the premium of $2.20 per share further sweetened the deal, contributing to the overall profitability of the trade.
This represents a return of approximately (2.2/213.67) X 100 = 1.03% in one week or about 52X1.03 = 53% return annualized. Isn’t that amazing!!

How does this compare to the returns on your term deposit, superannuation, 401K or IRA plans?

See Yahoo Finance website for the latest on the Tesla (TSLA) stock. The snapshot below is taken from Yahoo as of Monday 6 November 2023.

Tesla stock details

Tesla stock details

 

Even better, what if the price of Tesla is say $226 at the expiry of my option contract (the market will close around 4pm Eastern on Friday November 10)? This will mean that I need to sell my shares at the agreed price of $225 (strike price). Therefore, the approximate total return for the week will be:
2.20 (premium) + 11.33 (stock price capital gain) = 13.53 per share.

This represents a return of approximately 6.33% weekly or 329% annualized. Nice returns for about 10 minutes work. Does that return blow your socks off? It should!!

Actionable Advice for Implementing Covered Call Options:

For those looking to replicate this success, it’s crucial to approach covered call options with a well-defined strategy. Conduct thorough research on the underlying stock, considering factors such as volatility, fundamentals, and market trends. Select an appropriate strike price and expiration date that align with your risk tolerance and profit objectives. Remember, the covered call options strategy can be a powerful tool, but it does careful consideration and risk management. This strategy is low risk, but not no risk.

To execute this strategy, you need a low-cost broker. In my case, I use Interactive Brokers (IB) as my options broker. Please note that this is an affiliate link. If you use this link, and meet IB’s requirements, you will be able to receive some free IBKR stock. IB is considered one of the better brokers for options trading and trading costs are minimal.

Conclusion:

As we wrap up this brief journey into the covered call options strategy, the potential for easy income generation is abundantly clear. My recent trade with Tesla serves as a testament to the effectiveness of this strategy when executed with precision and strategic foresight. By integrating covered call options into your investment approach, you too can unlock the potential for enhanced profitability in 2023 and beyond.

Your PROFITABLE ACTION STEPS this time around:

  1. Try to study and learn more about trading options.
  2. Focus initially on using Covered Calls. Try and trade in a test / sand box environment initially until you have the strategy mastered.
  3. Keep reading and learning. Find great investment books and knowledgeable YouTube channels. This will help you decide on suitable investment objectives and strategies.
  4.  As always, do your research first and consult your own financial planner/adviser.
  5. If you haven’t read this article on the ‘ELEMENTS OF INVESTING’, you will find it an interesting and informative read.

Stay safe, healthy and wise and most importantly of all, take ACTION.

 

 

 

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