How to use Covered CallsCovered Calls can be extremely helpful to produce cash flow or monthly income on stock you already own. It is best used when the stock you own is up-trending or sideways trending. Let's use the example below, saying you own this stock. If you owned it for a little over a year in that time it went from 22.5 to 25. Not much action going on, a sideway trends, where's the money? It's hidden in a strategy called Covered Calls. How can you do this? Simply sell the right to buy the stock you own. Let's say you decided when you bought this stock to sell an Out Of The Money call every month.
We will also say on average you got $.30 per call you sold. Let's see....you owned this stock for 18 months, so you would have made $5.40. That's a 24% return in addition to the 10% you made on the up trending stock. Wouldn't you rather have 34% than just 10%? This strategy can greatly increase your monthly cash flow. However, there is a drawback. If you sell the $30 call on a stock that is $25 and it skyrockets to $38 you will get called out and have to sell at $30. There is another way around the trade, if you insist on keeping the stock simply re-buy the Call for a loss. Instead of thinking that you sold a $38 stock for $35 it may be better to think of the trade as buying a stock for $25 and selling it for $30.30 in this case. Remember to always paper trade and test your strategies prior to making real trades in the stock market.
 
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