Passive Income on Stocks You Own
Most retail stock investors (that’s us!) believe they have to buy stocks and wait for them to increase in price to get a return. This, of course, is one way to make a profit on stocks. But it isn’t the only way.
I recently wrote about how to Buy Stocks at a Discount building in a certain amount of profit as you buy the shares.
But, what if you already own the shares? Can you earn a monthly income from your shares? The answer is − absolutely!
This type of trading is known as Covered Call (CC) stock options. Depending on your broker, you may see it identified as Covered Call Writing (CCW).
As I mentioned in my previous article, buying stock options are a way of buying insurance to reduce your risk from stock market losses. But selling that insurance gives you the ability to earn passive income on stocks you own.
If you purchased stock with Robinhood or Tastyworks and you have at least 100 shares you can sell a CC. Covered Calls gives the buyer the right, but not the obligation, to “call away” (they buy) your shares. So, the downside of this income stream is the buyer can buy your shares at a lower price. A Put option is the opposite where you get assigned (you buy) the stock if the price falls.
Some rules to follow are:
- always select a strike price higher than your original purchase price (this is your cost basis) and,
- select a strike price that is out of the money (OTM) with only a 30% probability of becoming in the money (ITM).
In step one, if you select a strike price (the price of the shares purchased from you) that is higher than your original price, then you can only lose on this strategy if the price of the stock falls drastically. If the price of the stock increases at or above the strike selected, your shares may be called away (purchased from you) but for a higher price than you paid, plus you receive a premium for selling the insurance to the buyer. This is an excellent way to generate consistent, passive income.
And selling CCs is the second-best side hustle next to selling Puts. The only…