I wanted to provide an update on a few transactions I made earlier this week that fit with my strategy for combining high dividend yielding stocks with covered call options. The transactions were made around my position in HTE (see Combining high dividend yields with covered call options). I currently own 200 shares of HTE which pays a nice monthly dividend. In order to increase my passive income on a monthly basis, I sold 2 May $22.50 Covered Call contracts back in April (2008) and generated $151.99 in additional income during the month. One of the downsides for using this strategy is losing out on the stock if the share price is above the strike price on the 3rd Friday in May. Earlier this week, shares of HTE pushed above the May strike price, so I decided to take action. I wanted to make sure that I could continue to receive the monthly dividend that HTE pays out and not lose out on the stock later in May. As a result, I made the following transactions to my portfolio:

• Bought 2 May $22.50 Call contracts @ $.70 / contract - I purchased back the 2 May $22.50 Covered Call contracts I original sold in April. The total price of the transaction (commission included) was $148.00.
• Sold 2 June $22.50 Call contracts @ $.95 / contract - I turned around and made a second transaction by selling 2 June $22.50 contracts. The total proceeds of the transaction (commission included) was $180.49.

NET RESULT OF TRANSACTIONS: $32.49 in positive cash flow

Final Thoughts
This week’s transactions allowed me to continue to “stay in the game” with a stock that I believe has a lot of upside. By making these moves, I will collect the May and June monthly dividend distributions for my 200 shares. I also increased my monthly cash flow by $32.49. Hopefully the stock will continue to trade in its current range which will allow me to keep making additional trades as the ones I made this week. The one downside is if the stock makes a huge run to the upside, then eventually I will lose out on the stock. If this happens, I will take my proceeds and move on to the next stock.

Related posts:

1. Combining High Dividend Yields with Covered Call Options
2. Wachovia Covered Call Contracts
3. Can Covered Call Income be Considered Passive?

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Today, I would like to discuss a new strategy that I have been using to increase my passive family income. Back in February (2008), I wanted to start purchasing stocks that paid a nice dividend to help supplement my family’s monthly income. With all the unknowns in the U.S. Economy and a recession lurking, picking a good stock that I felt comfortable with was extremely difficult. My primary focus was to find an energy stock that paid a steady monthly dividend. After researching several possibilities, I decided to begin purchasing shares of HTE (Harvest Energy Trust). Harvest Trust Energy is a Canadian Royalty Trust (Canroy) who specializes in the exploration and development of petroleum and natural gas.

History of my HTE purchases (as of April 30, 2008)

• 02/20/2008 – Purchased 30 shares of HTE for average price – $25.07
• 03/04/2008 – Purchased 20 shares of HTE for average price – $23.50
• 03/17/2008 – Purchased 25 shares of HTE for average price – $23.17
• 03/20/2008 – Purchased 50 shares of HTE for average price – $22.14
• 04/17/2008 – Purchased 25 shares of HTE for average price – $24.12
• 04/23/2008 – Purchased 50 shares of HTE for average price – $23.01

GRAND TOTAL INVESTMENT – 200 shares of HTE with an average share price – $23.31

After I began purchasing shares of HTE, I decided that I wanted to expand my passive income for owning these shares beyond the monthly dividend. I began researching the possibility of selling Covered Call options to increase my monthly cash flow. Unfortunately, I only owned 125 shares at the time and selling 1 Covered Call (1 call = 100 shares) did not make much sense. So I decided to increase my position to 200 shares so that I could sell 2 Covered Calls, which would bring in additional income. The details below show the passive income generated from owning shares of HTE through April 30, 2008.

• 04/15/2008 – March Dividend received – $18.73 ($22.04 less $3.31 Foreign Tax)
• 04/23/2008 – Sold 2 May $22.50 Covered Call Contracts for $.80 apiece – $151.99

GRAND TOTAL PASSIVE INCOME – $170.72 (through April 30, 2008)

After factoring the price of my HTE investment with the Passive Income earned through April 2008, the average share price on the investment (commissions factored in) is:

200 shares of HTE @ $22.46 / share

Planning for the month(s) ahead

You may notice that I currently own 200 shares of HTE and have also sold 2 Covered Call contracts for the May $22.50 strike price. The current price of HTE is just below the $22.50 strike price which means that on the third Friday in May, I stand chance to lose my 200 shares for $22.50. If you notice above, I have calculated my average share price for the 200 shares at $22.46 (after factoring in dividends earned and proceeds from selling the 2 Covered Call contracts). Assuming I take no action and the share price of HTE is higher than $22.50, I stand to make $8 from owning this stock since February. Not a favorable return for a $4,662.35 investment.

As the weeks and days grow closer to the 3^rd Friday in May, I will be monitoring the stock price so that I can take action to “stay in the game” with the stock. The list below defines my strategy for the month of May depending on the stock price.

• HTE is below $22.50 / share – If the HTE share price is well below the strike price of $22.50, then I will take no action and wait to sell additional June calls.
• HTE is above $22.50 / share – If the HTE trades at or above the May strike price of $22.50, I will purchase back the two Covered Call contracts (HTEEX – May $22.50) I sold and sell two new Covered Call contracts for June (HTEFX – June $22.50). These two transactions will allow me to “stay in the game” with this stock while continuing to receive the monthly dividend and making some additional income along the way. If you notice, the June $22.50 Calls are higher than the May $22.50 calls which will result in positive cash flow for this transaction.

Lessons Learned

Although I am happy with my investment into HTE and the Passive Income that I have earned from the stock, I wanted to include some lessons learned on my purchases, so I can learn from my mistakes. I like to work for process improvement in my trading and investments so I don’t make the same mistakes twice. The following lists the lessons learned from HTE:

• Buy in larger increments – Buying in increments lower than 50 does not make a lot of sense. I made 4 of my 6 purchases of HTE with fewer than 50 shares which drives up the average share price with commissions factored in. I should have been more disciplined with my purchases setting aside the funds to buy increments of 50 or more instead of making several smaller purchases.
• Have a long term goal – Define my goal ahead of time. My first 3 purchases of HTE were basically random in nature without any goal in mind. I knew I liked the stock and wanted the monthly dividend, but did not really have any focus on the longer term. It wasn’t until my 4^th purchase of the stock that I knew I wanted to sell Covered Calls against the stock to generate additional positive cash flow. That purchase pushed me over the 100 shares, which would allow me to sell a Covered Call (remember – 1 option contract = 100 shares).
• DRIP – When I made my first few purchases, I knew that I wanted to re-invest the dividend income back into buying more shares of the stock. Unfortunately, I did not sign-up for the Dividend Reinvestment until after the first monthly dividend was distributed. This resulted in receiving the monthly dividend payment, but it wasn’t invested directly back into the stock.

Giving Credit

I am a firm believer in giving credit where it is due. I came across the stock pick of HTE from reading several posts on the Living Off Dividends blog which provides excellent material on dividends and Canroys. I still completed my due diligence on the stock but may not have come across it without the help of this site.

Final Thoughts

The strategy I am using is nothing new to the investment world, but is new to me. I have found it to be a useful strategy to date but will continue to work on improving it while noting my lessons learned. At the beginning of each month, I will post activity for the prior month for my shares of HTE, along with my lessons learned and steps for additional improvement.

Related posts:

1. Continuing a Covered Call Options Trading Strategy
2. Passive Income via Covered Call Investing
3. Can Covered Call Income be Considered Passive?

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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?

Related posts:

1. Passive Income via Covered Call Investing
2. Continuing a Covered Call Options Trading Strategy
3. Wachovia Covered Call Contracts

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