Many stocks pay a dividend. Many do not. But there is a way to make all stocks pay 12 *extra* dividends per year (even those that already pay dividends).

The strategy is called “covered calls” and it is the most popular options-based strategy. In fact, online broker Charles Schwab has said that 84% of their accounts that are approved for option trading do covered calls.

So what is it and how do you do it?

It’s pretty easy. First, you buy stock. Or you can use stock you already own. But you need to have at least 100 shares. Second, you sell a “call option” against your stock and receive cash today. That’s it.

So what are you giving up in exchange for the cash you get today? You are agreeing to put a cap on the upside from your stock within a certain period of time.

For example, imagine you own 100 shares of Cirrus Logic (symbol CRUS, they make a lot of the chips in Apple products). CRUS is trading at $16.34/share right now, so that’s $1634 of stock. With 100 shares of CRUS you can sell 1 “Nov 17 call option” for 80 cents/share, or $80.

What that means is you get the $80 today, and you can keep that money. In exchange for taking that money you agree to sell your 100 shares of CRUS to the guy who gave you the $80 for a price of $17/share any time between now and Nov 19 (when the Nov options expire). So, no matter what CRUS is at, if it’s over $17 you will only get $17. But, if CRUS is below $17 on Nov 19 then you keep the $80 from the option, and you keep the 100 shares of CRUS you have. The November option expires and now you can sell another option for the December cycle.

Now, $80 may not seem like a lot but that was on only $1634 of stock. If you have 10x as much stock (1000 shares for $16,340) then you’d get 10x as much option premium ($800). In either case, on a percentage basis you’re getting over 5% for about 5 weeks of time (which is a lot, but CRUS has earnings coming out soon).

Using this strategy it’s possible to generate recurring monthly income. Each month you sell call options against stocks you own. If some of them are called away because the stocks went up then you can use the cash you receive to buy more stock. If the stocks stay flat or go down then you keep the money you got from selling the call options and can do it again the following month.

So how much can you make? A good rule of thumb is 2% per month of the value of the stocks you have. That may seem small but if you do it 12x per year then that’s 24% per year. Which is a whole lot better than any cash or bond interest rate you will find.

For more info on this strategy, a free newsletter, and a free tutorial, please visit Born To Sell.

Comments by John – I have had mixed results selling covered calls in the past against stocks that I owned. The biggest reason why I struggled with some trades was my lack of experience in options trading. If you want to learn a little more about selling covered calls with the potential of building a recurring income stream, you may want to check out Mike’s site

Mike Scanlin is the CEO of Born To Sell, Born To Sell, a web site dedicated to helping people earn monthly income from selling call options. Mike has been selling covered calls for 30 years and his career includes software engineer, investment banker, venture capitalist, and start-up CEO.

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2. Wachovia Covered Call Contracts
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Last week I posted that I purchased 100 shares of GE (General Electric) as part of my strategy for creating new income streams. To learn more about this strategy, please review my post – Combining high dividend yields with covered call options. Today, I would like to alert my readers that I have added 100 shares of BAC (Bank of America) to my portfolio using the same strategy. While I understand there is a current market downturn in the financial sector, I feel that this is an opportunity to invest in a stock that I have wanted to own for some time. I also understand that the future looks very bleak for this sector and there will probably be more downward pressure on the stock in the near term. However, I believe that selling Covered Calls to hedge against this purchase will help to reduce this downward pressure on the stock.

Details of the Trade
The follow list details the trading activity -

• Purchased 100 shares of BAC for an average share price of $25.35 (commission included).
• Sold 1 July 27.50 Covered Call contract for net proceeds of $54.99

I continued to follow my strategy for combining high yielding stocks with covered call options and met the following criteria that I have been using -

• The stock purchased must be one that I don’t mind owning over the long term. As I stated earlier, I have wanted to own BAC for some time. I think that long term, BAC will be fine and I will look back at this purchase with a smile on my face.
• The stock needs to pay a steady dividend. At the time of the purchase, BAC was yielding around 10%. I also completely understand that there is a chance that the dividend could be cut – although management has said otherwise.
• The Options activity on the stock needs to be attractive.
• I must have enough resources to purchase a minimum of 100 shares required to sell 1 Covered Call Options contract.

Risks
As always, there is risk involved in trading stocks and options. I have identified the following 2 potential risks in making this transaction.

• Stock Jumps – One possible risk is losing out on the stock. In the event that BAC jumps past $27.50 per share before the 3rd Friday in July, I would probably lose out on the stock. Let’s face it – this is not going to happen in the next 2+ weeks. If it did, I would return over 10% on my transactions in less than 1 month.
• Stock Drops – The other scenario and risk is if the stock has a major drop along with the rest of the market. This is a concern given the current market, but I believe that selling Covered Call options on a monthly basis will hedge against this trend.

Opportunities
I believe that this transaction provides an excellent opportunity to generate monthly cash flow which can be reinvested into purchasing more and more assets. This fits with my long term strategy of becoming financially independent. I will continue to sell Covered Call option contracts against my position when appropriate to generate this additional income.

What do you think about the trade? Do you think this is a good way to generate monthly cash flow?

Disclaimer - I am not recommending the purchase of Bank of America stock in regards to this post. Instead, I am detailing my strategy for generating monthly income by using this stock as a catalyst. Please do your own Due Diligence before making any purchases. Thanks!

Related posts:

1. Passive Income via Covered Call Investing
2. Creating a new Income Stream – General Electric
3. Wachovia Covered Call Contracts

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Recently, I have been looking to create a new income stream by purchasing an asset which will generate monthly cash flow. I decided to purchase 100 shares of GE (General Electric) earlier this week near the stock’s 52-week low. I have always admired General Electric as a company and found a great buying opportunity. While I believe there are several rough quarters in front of GE, I still think it is an excellent company and will be fine for years to come. As part of this purchase, I followed my strategy for Combining high dividend yields with covered call options. The stock purchase met the following criteria that I use in this strategy -

• The stock purchased must be one that I don’t mind owning over the long term. As I stated earlier, I have always wanted to own GE and found an opportunity this week to make the purchase.
• The stock needs to pay a steady dividend. At the time of the purchase, GE was yielding around 4.5% and has had a strong history of raising it’s dividend.
• The Options activity on the stock needs to be attractive.
• I must have enough resources to purchase a minimum of 100 shares required to sell 1 Covered Call Options contract.

Details of the Trade
The follow list details the trading activity -

• Purchased 100 shares of GE for an average share price of $27.55 (commission included).
• Sold 1 July 29.00 Covered Call contract for net proceeds of $31.99

Risks
As always, there is risk involved in trading stocks and options. I have identified the following 2 potential risks in making this transaction.

• Stock Jumps – One possible risk is losing out on the stock. In the event that GE jumps past $29.00 per share before the 3rd Friday in July, I would probably lose out on the stock. Now, I don’t really view this as a risk but more as a lost opportunity. If I were to lose out on the stock with a jump in the price, I would still profit – $168.99 in less than one month for a 6% gain. If I could raise 6% per month for the entire year, I could retire early.
• Stock Drops – The other scenario and risk is if the stock has a major drop along with the rest of the market. This is a definite possibility, but one that I can live with. As I stated above, GE is a stock that I don’t mind holding long term. I would continue to sell Covered Call Options when applicable against the stock to generate the monthly income. In addition, assuming that they don’t completely cut their dividend, I can also collect each quarter and increase my net shares.

Opportunities
I believe that this transaction provides an excellent opportunity to generate monthly cash flow which can be reinvested into purchasing more and more assets. This fits with my long term strategy of becoming financially independent. I will plan on using following the steps listed below assuming the stock does not have a huge jump past $29 per share over the next several weeks.

• Sell Covered Calls – If the July 29 Contract expires, I will then look out to August to find an opportunity to sell another Covered Call contract against GE which will bring in monthly cash flow. The plan is to continue to do this each and every month depending on the current market situation.
• Reinvest Dividend – I will plan on reinvesting the quarterly dividend directly back into the stock which will increase my total shares and help to generate additional income down the road.

What do you think about the trade? Do you think this is a good way to generate monthly cash flow?

Disclaimer - I am not recommending the purchase of General Electric stock in regards to this post. Instead, I am detailing my strategy for generating monthly income by using this stock as a catalyst. Please do your own Due Diligence before making any purchases. Thanks!

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1. Warren Buffett buys General Electric
2. Creating a new Income Stream using Prosper
3. Adding Bank of Amercia (BAC) to the portfolio

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