Introduction to Landlording (Covered Calls)

Ever thought it would be nice to find a way to collect more than the basic annual 3% dividend? What if I told you there was a way to easily collect that 3% dividend EACH MONTH rather than yearly. What if I also told you that there is no more risk in doing this than owning a stock. Well there is and this strategy is called COVERED CALLS. In a nutshell you rent your stock to somebody for 2%-10% PER MONTH. My name is Chris and I am the LANDLORD.

I rent my stocks out in a strategy so safe that even the IRS let's you do these trades INSIDE your IRA. Here is technical definition of a Covered Call (also known as a buy-write):
A call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

Okay now for the real life scenerio. Here is one that I did just last week:

Stock ABC is trading at $22 a share. I buy 100 shares of that stock for $2200. (actually I have about $1 in commission for this trade but we will leave out commissions for now). I then go to any stock source and look up ABC stock options and see at what price the calls are selling. For this particular stock the May Call Expiration (always expiring the 3rd Friday of each month) was selling for $2 at a strike of $24. In other words somebody is willing to pay me $2 for each of my shares that I bought at $22 for the right to buy this stock from me in the next 4 weeks at a price of $24. Here now are the possible outcomes:

Stock closes on strike day @ above $24 - Buyer pays me $2400 for my 100 shares (remember I still keep the original option premium of $200 on top of this). Net return of almost 20% in one month.

Stock closes on strike day @ $24 or less. Buyer doesn't want to buy my stock so they let the option expire worthless and I keep the $200 premium and write a new option the next month.
In my opinion both cases are a win-win situation. So what is the downside? Well if the bottom falls out of the stock over the next 4 weeks you still own the stock. In my opinion I would own the stock anyways so why not get the option premium!

Covered Calls have allowed me to retire early at the ripe old age of 39. For no other reason than I enjoy the subject I am writing this blog and I am going to post all my trades as close to real time as possible (usually within 5 minutes). Follow along as we play "landlord" to the stock market.

CYA - This blog and all stocks discussed here are for discussions purposes only. Option Trading is an advanced investment tool and should only be used by experienced investors. Do you own due diligence and consult your financial advisor before making any trades.
Happy Trading,
The Landlord