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How to Use Covered Calls to Make More Money

Using covered calls as part of your overall investment strategy can help you make more money from the stock positions you already own. Here’s how.


Many stocks, especially tech names, are currently trading at or near all-time highs, but given how uneven the rally has been, you may have generated much more modest returns last year.

If you’re long-term bullish on a position that isn’t showing a ton of momentum, you may want to consider using covered calls to boost the overall returns.

The risk of covered calls is sacrificing some of your upside potential to put immediate cash in your pocket, but if you’re neutral on a position in the near term, the rising levels of volatility in the market are juicing premiums for call sellers. Keep in mind, this is still a net bullish trade, so if you’re bearish on a stock, a covered call strategy isn’t ideal to repair a broken position. Cutting bait may be the better option there.


How to Use Covered Calls to Boost Your Profits

A covered call is a strategy that consists of owning an underlying stock and selling an option against the stock. Since a call option represents 100 shares of the underlying stock, you can sell one call against each 100 shares of stock you own. Because you own the stock, your short call position is “covered” by the stock.

A short option position by itself (without the stock) is very risky and requires a substantial margin balance.

A short call on a stock you own, on the other hand, is a very conservative strategy that requires no margin.

I would recommend a covered call options strategy against virtually any stock an investor holds. In my mind, it’s free money, and best of all, it’s a great way to start learning about options and options trading.

Let’s dive a bit deeper into how to use covered calls with a stock that’s recently been trading sideways.

Had I bought 100 shares of Apple (AAPL) a month ago, after 30 days I would be up 0.4%. That’s better than losing money, but nothing to write home about.

However, with AAPL trading at 186, if I sold an AAPL March 8, 190 call for $4.00 against my stock holding, which is actually $400, my yield could be as high as 2.1% if AAPL has another month of trading like the one it just had and the calls expire worthless.

The downside to this strategy is by selling a call against my stock holdings, if AAPL exploded higher, I would not participate in the large stock gains, as the buyer of the call would have exercised his right to buy the stock from me. In the case of AAPL, I would have made money until the stock traded above 190; however, above 190 my profits would be capped.

The net result is that I would outperform by selling a call if AAPL closes between 182 and 194 on expiration (because of the $4 premium received), but would underperform if AAPL traded above 194.

This is the exact strategy we use at Cabot Profit Booster, where we sell covered calls on Mike Cintolo’s weekly Cabot Top Ten Trader stock picks, which are 10 of the week’s strongest momentum stocks. We are looking to buy the best-looking stocks, as chosen by Mike, and then sell covered calls against those stocks to rack up yields ranging from 3-20% month after month.

If those sound like the kinds of monthly returns you’d be interested in – or if you simply want to learn more about covered calls or options trading in general – click here to become a Cabot Profit Booster subscriber.

Do you use covered calls? If so, tell us how they have enhanced your portfolio.


*This post is periodically updated to reflect market conditions.

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.