What’s going on guys today I wanted to discuss this follow-up video referring to the three stocks I mentioned in my previous video AbbVie ($ABBV), AT&T($T) and Realty Income ($O) that video I talked about how much it takes of each of those stocks to make $100 a month in dividend income. Now today I’m going to talk about another way you can make weekly and monthly income from your stock portfolio.
The requirements for this strategy, you do have to hold 100 shares of the equity and you do have to be approved with your broker to sell this type of option trading. I believe it’s level 2 with most brokers, it’s just the ability to sell covered calls.
So yeah let’s go ahead and jump into it. So this is assuming you own 100 shares of $ABBV right around $85 est. per share which is going to cost you around $8500. So with the market being kind of red today it might not be the best day to sell Covered Calls because typically I like to sell on green days just because you know the premium will be more. So there’s a couple things you have to determine when Selling Covered Calls, first of all what you’re willing to sell Your shares away at so currently it’s at 85. Let’s just assume my cost basis is 85 which I believe it is I just bought them today for this video so I typically don’t want to sell a covered call less than my cost basis because that means I would be losing money so I typically like to aim at least you know above whatever I bought the bought the shares for. Option contract expirations are offered on a weekly and monthly basis.
So as you can see with AbbVie they offer a weekly expiration date which is good because you can essentially do four per month but yeah so for this example let’s just go ahead and assume you want to choose an expiration date of October 23rd so it’s a little bit more than a week out. So this is on the ThinkorSwim Platform but let’s go and jump into it so it’s currently trading for 85 as you can see here this is about a week out so the premiums aren’t real high the farther you do go out the higher the premiums will be, but with that you’re taking on more time risk exposure. For example, let’s say we selected the 90 Call option for October 23rd we would be getting $6 dollars in premium minus commissions.
If we went a little bit farther out let’s say November 13th and let’s just say the same strike price of 90 you would be receiving a $65 credit but you’re probably wondering why is that, it’s because it’s a farther expiration date meaning you’re taking on more risk as the option seller because you’re allowing the stock price to increase for a longer time. For this example let’s just say a week out so we’re receiving a $6 dollar credit for $ABBV and we’re pretty much saying that we don’t believe $ABBV will go above 90 before our expiration date of October 23rd. As time passes we will make money from the Theta Decay.
Also if the price drops we’re going to make money because it’s less likely to get back to our strike price, that’s pretty much the two ways we can make money from this strategy. Now if $ABBV comes out with some news and it shoots the stock price really high and you don’t necessarily want to get rid of your shares at 90 because you think it’s going to go to like 120 you can roll it out without selling your shares. Thinkorswim makes it really easy to do. Essentially to roll your position, you will be buying back your short call position and selling a new call option with a further expiration date.
The next example was Realty Income ($O). The difference with Realty Income is they only offer monthly expiration dates, so you can only do this strategy once once per month. For example, we will select the November 20th Expiration Date and let’s just select the 70 strike price. The probability this contract will expire in the money is 5%, so your chance of profit is 95%. Do remember that options can move very quickly & these probabilities can change very fast with stock price movements. Let’s elect the $70 strike for a $10 credit, with the expiration date of November 20th.
Do keep in mind the stocks with less IV (Implied Volatility) will produce less premium, because they are less likely for larger price movements. For the last example of $T (AT&T) let’s select the October 30th exp. Date, a couple weeks out and let’s say we’re going to sell the 30 call for $4 dollars. Definitely not a huge amount, but still better than nothing & if you’re able to sell them every week, it can add up to a decent amount throughout the year.
After the call option expires on the 30th, it will take a few days to settle, but the great thing is the following week you will get your shares back and be able to start the process again & sell another call.
Selling Covered Calls is just another great trading tool & strategy that can be good to use for certain markets. But they do come with some risks, so be sure you understand that you are selling out on some of your upside potential for the chance to collect weekly/monthly income.
Always do your research before investing & trading options. This is not financial advice, this is for educational purposes only. I hope you enjoyed this article & if you have any questions feel free to reach out!