There are many stock investors today who earn their income by trading options. These investors have several different options trading strategies available to them that are considered low to moderate risk. One of these low risk methods for trading options is known as “writing covered calls”.
The main requirement of writing a covered call is that the investor must already own at least 100 shares of a stock. The term “covered” means that you already own the shares of the security and can transfer it to the buyer if the contract is “called”. There are many more details involved in trading covered call options, which we don’t have time to cover here. If you are interested in trading options, please do some research on your own before you get started.
The great thing about trading these types of options is that you can earn covered call income just from owning a stock. There are some valid concerns that you need to be aware about, but overall it is one of the least risky options trades you can make.
Depending on your investment strategy, some investors earn a steady monthly income just from selling covered call options. These are seasoned traders who understand the stock market as well as the positions and companies that they own. Some dividend investors can even “double dip” and earn a steady income from monthly or quarterly distributions made by the company as well as income generated from selling covered calls against the same position.
All of this sounds great? What better way to build passive income then to start buying up dividend paying stocks and selling covered call options against those positions every month?
Can covered call income be considered a viable passive income stream? Let’s take a look.
Passive Income Basics
There are plenty of different definitions of passive income depending on who you talk to. To most people, the term refers to a form of revenue or income source that requires very little effort or time once established.
There are some people who believe that passive income does not exist, while others tend to exaggerate the definition a little too far. Regardless your opinion, I think we can all agree that building income streams that require as little additional work as possible on your part is something everyone wants.
I tend to believe that there are many forms and levels of passive income. The key is to continuously look for improvements to reduce the time and effort it takes to maintain an income source while maximizing your returns.
For additional information, be sure to check out – What is passive income?
Is Covered Call Income Passive?
Based on the information outlined above, I would say that selling covered calls is NOT passive income. While in many cases, covered call income can be a great way to increase the value of your stock portfolio, there is just too much time required to make it passive.
Those who trade covered call options spend a lot of time researching existing stock positions and covered call contracts. They also need to be aware of what is going on in the stock market and global economy. Once an existing covered call contract expires (if it is not called), then the investor must spend the time to identify a new covered call contract to sell in order to keep the income stream flowing. All of this activity is way to much time and effort for this to be considered passive.
Important Disclaimer
I enjoy trading options in general and use them to help build my portfolio income. While I believe that options trading is a viable way to earn money, I recognize that it is a difficult stretch turning it into anything that resembles a passive income stream.
If you are interested in learning more about selling covered call options, I would recommend the following eHow article as a place to start – How to Sell Covered Call Options. I would also be happy to discuss topics around options trading with anyone interested.
Are there any forms of portfolio income that you consider passive? What are your thoughts on earning covered call income?
{ 1 comment… read it below or add one }
When I was writing covered calls, I spent hours upon hours upon hours just to make one trade. The amount of research needed to be successful was enormous. I still love selling covered calls, but now I only do so every couple of months! As such, I would not consider it a true passive income source.
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pfincome Reply:
October 26th, 2009 at 7:31 am
@Dusty – Actively trading stocks and/or options is very time consuming. It is one of my favorite ways to make money, but is anything but “passive”!
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