Make $1,225 Monthly Passive Income Selling Covered Calls

So, you already have your investment account set up and you're trying to diversify your income streams and you're trying to figure out, okay, I have a larger sum of money. What can I do to generate some short-term income? Because in the investing world, you probably don't want to wait in the next, say, 15, 20, 25, or 30 years or so to then take out your money. So, what are some strategies that you can use right now to generate monthly passive income? So, in this video, I'm going to talk about covered calls and this is one of my favorite strategies that I've been using for a very long time for my portfolio. This is what a lot of our community members do, what a lot of our coaches do, and funny enough, this is what something that my mom also does in her portfolio as well. So, in this video, I'm going to walk you through what covered calls are, the pros and cons, like the risks and rewards, and even talk about the, you know, basic mechanics. I'll do a step-by-step tutorial on how you can sell covered calls on your desktop, okay? So, I'm going to give you step-by-step instructions so that you can do it, too, if you feel comfortable using the strategy in your portfolio. Again, this isn't financial advice or anything. You just want to make sure that you are comfortable using any of these strategies, anything that I talk about here in your portfolio uh for yourself. So, let's get to it. I'm going to share my screen here and if you haven't done so already, make sure that you download my study guide, if you haven't done so already, because I spent a lot of hours putting all everything together for you. So, this way you can follow along and learn the most effective and efficient way possible. So, let's talk about what covered calls are. Essentially, a covered call is an income option strategy where you essentially own 100 shares or multiple 100 shares of an underlying stock and then you can sell someone else the right to buy your shares away from you for a specific price. This is called the strike price by a specific date. This is called the expiration date. And in return, you collect a an income and this is called the premium, okay? So, I used to be a public school teacher, so I love to simplify these complex ideas into these bite-size pieces. So, essentially, what a covered call is, if you really break it down, it just comes down to two steps. Step one, you're going to buy 100 shares or multiple 100 shares, and then you're going to sell one contract. That's it. Down to the bare-bones minimum, that's what the procedure is for selling a covered call. Now, I know you might be listening to this or reading this and you're like, "Okay, this sounds like a mouthful." So, it's okay. I am going to simplify this by giving an analogy, a a little story. So, let's use the baseball card example, which I often give. So, let's pretend that you have this rare baseball card, and it's worth $500. And you're like, "Okay, I want to sell this card because I bought it for maybe $100 a long, long time ago, and now it's worth $500." So, you go onto any marketplace, maybe Facebook Marketplace, Craigslist. I'm not sure if anyone still use Craigslist. But, you put up your card for sale. And you find someone named Craig who wants to buy your card for $500. However, when you're texting Craig, Craig says to you, "You know, I don't want to buy your baseball card now. I don't have the money right now. Instead, can I decide if I want to buy it later, like maybe in a month, in the next 30 days?" And you're like, "Okay, great. But, what do I do in the meantime?" And Craig's like, "Okay, well, can you hold onto the card for me and not sell it to anyone else? And if you do that for me, I will pay you a reservation fee. Okay, I'll pay you $20 right here. $20 for you to take down your posting and not sell it to anyone else. Hold it for me so that in the next 30 days, if I do decide to purchase the card, you can sell it to me or not, whatever it is, okay? So, that's it. By the time that you get to the next 30 days, you fast forward into the future, Craig is going to give you a decision if he wants to buy your card or if he doesn't want to buy your card. If he changes his mind, guess what? Because you already fulfilled your contractual obligation with him, you still get to keep his $20 regardless of him buying your card or not. And on top of that, if he does decide to buy your card, he will then buy it from you for $500 on top of the $20. So, you make $520. So, essentially, this is what a covered call is. You are selling the right to someone else in Facebook Marketplace or wherever it is, someone around the world, and you are collecting this reservation fee and letting them decide if they want to purchase your shares away from you, yes or no, okay? So, let's relate this to actual stocks. So, let's use ABC as an example, a fictitious stock, and let's say that one share of ABC is around $100, and you like this stock, great. I'm going to talk about how to pick covered call stocks in a little bit, so stick around because I think this is really important. And let's just say that today, for simplicity, say today is January 15th, and again, one stock is worth 100 shares, or sorry, $100, and you are going to purchase 100 shares. So, if you multiply that out, 100 shares times $100, you invested $10,000 yourself. Great. So, you go into the option chain, which is kind of like the Facebook Marketplace Craigslist example. You go to the option chain, and you try to see who wants to buy your shares, and you find someone named Craig, and he is willing to purchase your shares for $101 each. Remember, you purchased the shares for $100, and you want to sell them for $101. So, this way you make a profit. So, this price that you are choosing to sell your shares, this is called the strike price. And then, because today is January 15th, the other person says, "You know, I'm going to decide 30 days later." So, this February 15th is the day that the other person, Craig, is going to determine if they are going to buy your 100 shares. This is called the expiration date. And of course, they are not going to purchase the shares outright right now, so they're going to say, "Hey, can you hold on to the shares and not sell it to anyone else? And in return, I'll pay you I'll pay you a reservation fee, $200 up front." So, this is called the premium. So, these are the terminology that you want to understand: strike price, expiration date, and premium. So, let's take a look at the different scenarios that can happen. So, generally, there are only two scenarios. Scenario number one is right here. ABC goes above $101. Okay? So, let's say that ABC goes from $100 now and it goes up to $105. Well, that's actually a good thing for Craig, because if you think about it, your contractual obligation to Craig is to sell it to him for $101. So, he's able to purchase your shares for $101 and then sell it back to the marketplace for $105. So, he makes a $400 profit there. But I know some of you math nerds are out there are going to say, "Well, what about the premium that he paid you?" And yes, of course, he pays that $200. So, his profit is actually a little bit lower, but essentially, he gets to buy your shares because he gets to buy them at a lower price and he gets to sell them for a higher price, if that makes sense. Okay? So, essentially, Craig wants to buy your shares because he thinks the stock is going to go up in the future. Cool. But here's the thing. It is also beneficial to you, too, because even if it goes above $101, you still get to keep the $200 premium, no matter what. This is the income that you get and you fulfilled your contractual obligation to Craig, right, by holding onto the shares. And if you sell your shares, your 100 shares, to Craig for $101, you make another $100 capital gain. Because if you think about it, you bought the shares for $100 and you sell it for $101, right? That's a $1 difference. And you have 100 shares, so that's a $100 capital gain. So, if you add this up, $200 plus $100, that's a $300 return, right? $300 or 3% monthly ROI. Very cool. Now, of course, there is a second scenario. What if ABC stays below $101? Well, again, you still get to keep the $200 premium, right? And because your shares are still worth $100 each, Craig doesn't want to buy your shares, right? For $101. Like, that doesn't make sense. Why would he buy them for a higher price? So, he is not going to buy your shares, so you still own your shares. Guess what? In the following month, you get to sell another cover call to collect even more income, to collect even more premium, if that makes sense. So, in this scenario, you make $200 out of your $10,000 investment or a 2% monthly ROI. All right? Okay. Now, here's the thing. Not all stocks are good for a cover calls because that's probably what you're thinking right now. Like, what stock is good for this or what ETFs? What do I need to buy? So, I'm going to go over some options for you and some of the guidelines that I go over so you can kind of see if this fits your risk tolerance and your comfort level. But, generally, when I pick stocks, I want to make sure that they are part of a large index. So, what is an index? I talk about this in a lot of my videos. It's a group of a whole bunch of companies, like the S&P 500, that tracks the top 500 companies in the United States or the Nasdaq 100 or the Dow 30, right? So, these are all large indices. So, one popular index or one popular ETF that tracks the S&P 500 is SPY, right? You can see that this is an upward trending ETF. It tracks the S&P 500. It has a lot of great companies inside like Nvidia, Microsoft, Amazon, so on and so forth. Another example is QQQ. This is also a very highly traded ETF. Both of these ETFs, a lot of people like to trade covered calls against their shares, which is what I also do myself too. I have SPY and QQQ. So, the first criteria is you want to choose a stock or ETF that is part of a large index. The second criteria, the second guideline is that they are fundamentally strong. So, you want to make sure that the company, the stock that you pick is a stock that is actually generating money, right? It's uh increasing in revenue year after year. People love their products and services. Like people like using them. People like the company. The third guideline is, well, they need to be technically upward-trending just by looking at the chart. So, I generally like to look at the 5-year, 1-year charts, and maybe even the 3- to 6-month chart. And if I use an example here like Amazon, AMZN, that's the ticker symbol. You can see that over the last 5 years if it's been trending a little bit sideways and also upwards, too. So, this could be a good candidate at the moment. And of course, last but not least, you can also see if the stock pays some sort of dividend because this usually signals to institutions that they are responsible companies and a lot of investors like to gravitate towards these companies that pay a dividend, okay? So, with that said, let's take a look at how you can actually do this on your desktop. Like how do you actually perform this? So, let's go through the tutorial. So, I am on the Thinkorswim web platform on Charles Schwab if you use Schwab, okay? And they also have a paper trading account. It's free. Anyone can open one up if you live in the United States, open one up. It's free. You can start paper trading or just trading with Monopoly money, so you're not actually using your money. So, you can actually understand the mechanism of how it works before you actually use your money. So, I'm on the thinkorswim web platform here and the first thing you're going to do is you're going to go to the magnifying glass and type in the ticker symbol AMZN. Great. Second step, you're going to type or you're going to go to the top right corner here, right? I put a little red rectangle here and click on buy. Because remember, there are two steps with the covered call. You're going to buy 100 shares and then you're going to sell a contract. Okay, so we're in step number one right now. We're buying 100 shares. You're then going to go right here and this little menu is going to pop up after you click on buy. So, you want to make sure that you are purchasing 100 shares, okay? You can select your order as in market order so you can purchase your shares at the whatever price it is right now. You don't really need to mess with limit order because it does add a little bit more complexity, but if you want to, go for it. I'm just going to use a market order for this example. Click on review right here and then you can double-check everything. Make sure that you are buying 100 shares and then you can click on send, okay? So, in order to do this, like what I said before, you have a larger amount of money that you can buy 100 shares of Amazon. So, $265 * 100 is $26,500, okay? Great. That's step number one, buying 100 shares. Step number two, we then go back to the ticker symbol AMZN and now we're going to go to the option chain. What is the option chain? That's right, it's the marketplace where people are buying and selling contracts, buying and selling shares. So, you can click on the option chain and then you can choose an expiration date, around 30 to 45 days away. That's generally the sweet spot. So, for this example, let's say it's June 26th, 2026. And it'll also tell you how many days away it is from today. So, 31 days. Go ahead and click on that. It's going to expand the drop-down and then you're going to see all of these numbers. And I know a lot of people feel like this is very complicated, but it's not. Okay, I promise you a lot of our community members who are in their 40s, 50s, 60s, even in their 70s, they are all doing this, too. All right, it's actually very, very easy. Okay, so let's take a look at these numbers. The only two columns that you need to focus on are the bid column and the strike column. That's it. Bid column and strike column. So, if you purchase Amazon for let's just keep it simple to at $265 per share and you say, "I want to sell them for $270." Make that $5 profit. Great. You can go to the strike column and go all the way down to this part here where it says 270, and then you're going to line it up with the bid column. Okay, right here. So, if you are new to this whole covered call world, whenever you look at the option chain, all of the numbers on the left represent all of the call options and all the numbers on the right represent all of the puts options. Because we're selling a covered call, we're going to focus all of our attention on the left side. So, we're going to look under the bid column and we're going to line it up with the strike price right here. So, $270. And you can see that it intersects at the $725 points. So, this means that you get paid $7.25 per share. And remember, because you have 100 shares, multiply that by 100, you get $725 worth of premium. Craig is willing to pay you $725 just for holding on to the 100 Amazon shares for 30 days. Okay? So, you do that, click on that, and then this menu will pop up. Make sure that your toggles are all right, that you're selling one contract, not 100, one contract at the expiration date that you chose for $270. Make sure this is a call option, not a put option, and then you can set it as a market order if you want. Select day as your option here or good to cancel if you want to have this trade on for the next 90 days. Click on review and then submit. Okay, so just to review here, you bought 100 shares. Step two, you then sold a contract. And once you hit that submit button, you basically get the $725 of income straight into your brokerage account. All right? So, that is income. That is real money. Some people ask me, "Is that real money?" Like it is real money that goes into your account, just like the interest from your high yield savings or the interest from your money markets. That is money, actual money that goes into your account. I know some of you have some light bulbs, you know, lighting up in your head. You're like, "Oh, wow, this is actually a really cool strategy." So, let's talk about what happens at expiration, right? Just like what I talked about with stock ABC. If Amazon, well, there's two scenarios, right? If Amazon goes above $270, well, you still get to keep the $725 worth of premium. And if you do that, you get to sell your shares for a $500 capital gain. Because remember, you bought the shares for 265 or around there, sold it for $270. That's a $5 difference. Multiply by 100 cuz you have 100 shares. So, that's a $500 capital gain. So, in essence, if you add it all up, you made $725 worth of premium and another $500 of capital gain, meaning that you just made $1,225 for the month. Make sense? Now, the second scenario is, well, what if Amazon stays below $270? Well, do you still get to keep the $725 premium? Yes, absolutely. That is your reservation fee. You fulfilled your contractual obligation by holding onto the shares, so you get to keep the $725 no matter what. And because you did not sell your shares, you get to then sell another round, another contract the following month to collect even more premium. Right? So, you get to do this over and over again. You're basically buying these shares and then you're just selling these contracts every single month. It's kind of like rental income where you buy a house and you collect monthly rental income. You buy the shares and you're collecting monthly premium income. Okay? Now, there are risks and rewards to using this strategy because I feel like a lot of people talk about this. Let's talk about the risk, okay? There's really just two main risks, okay? But the biggest risk is this one right here. The actual asset itself drops in value. So, if you think about it, if you buy 100 shares of Amazon and it just drops from $265 and maybe it drops down to $240, $230. Remember, those are actual numbers. That's an actual price. So, your brokerage accounts, your actual equity in the shares, your whole portfolio is also going to drop in value, right? And when you try to sell a covered call in the future, you might not be able to collect as much premium like $725. It might drop down to maybe $300 or $200 worth of premium. And a way that I like to explain this is using an analogy with rental income. So, it's kind of like you purchasing a house and the house itself is not a good house because it's in a poor location. People don't like it. People throw rocks at your windows. There's a lot of crime. So, the asset itself that you probably bought a million-dollar house for, it drops in value. It drops down to 900,000, 800,000, 600,000 dollars. And of course, you were renting out your rooms for $700 a month, but then a lot of renters will see that your house is not in a good location. So, are they going to want to rent in your house, rent to live in your house? Most likely not. So, you're most likely have to going to have to drop your rental income to maybe $500 or $400. Right? So, this is the biggest risk. There is going to be if your asset drops, your whole portfolio is going to drop in value, which is why we go back to the guidelines of us choosing stocks and ETFs that you follow this guideline here, okay? Or whatever it is that you're comfortable with, but it's part of a large index, it is fundamentally strong, it is technically upward trending, okay? And it most likely pays a dividend, even though this isn't actually required or anything like that, okay? So, that is the first risk. The second risk is you are going to have the probability, the risk of giving up your shares. So, if you are someone who says, "Oh, I don't want to sell my Amazon shares." But remember, whenever you sell a contract to someone and you agree on a strike price, you are contractually obligated to sell your shares at the agreed-upon strike price. So, if you say to Craig, "I'm going to sell you my shares at $270." then you have to sell it to him for 270, even though Amazon jumps up to $300. You're going to say, "Ah, I should have kept my shares." But that's that's the strategy here, okay? But again, if you think about it from a holistic perspective, the probability of Amazon going from 270 all the way to like $500 or $900 in a 30-day period is statistically rare. I'm not saying it's impossible, it's just improbable. So, you want to choose a strike price that you are most comfortable selling your shares for. But this is generally the risks associated with selling covered calls. And along with the uh taxable capital gains if you were to do this in a taxable brokerage account. But yes, you can also do this in your Roth IRA where you don't have to pay taxes on it upon withdrawal at 59 and 1/2. So, this is a powerful strategy if you want to uh use use in your portfolio. Now, let's talk about the rewards. Whenever you sell a covered call, one of the pros to this is that you get to lower the cost basis of your shares. So, think about it mathematically. You bought the stock ABC stock for $100, and you sell the covered call contract for $2 per share or $200, right? But, if you think about it, you're basically lowering the stock price that you purchased it for. You bought it at 100, but then you collected $2 back. So, essentially your new cost basis is at $98 per share, right? So, pretty interesting. There are a lot of covered call sellers like myself and my community members where they continuously sell covered calls against their shares over and over again where they basically just drop down their cost basis to like half, right? Of what they actually paid for initially. So, you can think about it as, again, rental income. You bought a house for a $500,000. You rent it out for $3,000 a month, and you're basically using that $3,000 to lower the cost basis of your initial investment of purchasing the house, the $500,000, right? So, this is a big pro, right? A big reward to this. Now, the other reward is that, of course, you get to collect this monthly income during temporary neutral or downward markets. So, if you think about the stock market, do we always go up in a straight line? Absolutely not. There are times where the stock market might trend sideways, which is perfectly normal like right here, or maybe we even go downwards. Do we might have some sort of pullback, a broad-based pullback, correction, something happens in the market. But, generally, like what we talked about in our other videos, if you zoom out, the stock market tends to like to go up rather than down in the long term, right? It's designed. It's programmed to do that. So, if we go into or if you go into a neutral trending market or a market, there is a strategy, this strategy right here, where you can still generate income. You can sell these contracts to other people and collect this income. If you think about a lot of the social media content that you probably have seen or read books, articles online where it's like people are able to make money when the stock market goes nowhere, this is one of the strategies right here. They sell covered calls, right? So, a lot of people they get stuck into the notion, the idea that they can't make money unless the stock market as a whole goes up, but absolutely false. You can still make money even when the stock market trends sideways or even downwards, okay? And if you think about it in terms of real estate, I I love using real estate as an example. If you have one home that generates $300, well, think about you having these 10 homes, right? You get to generate $3,000 a month. Similarly, if you use the stock market and you're selling covered calls, if you have one contract, you sell one contract, you're able to collect $200 a month, then if you have 10 contracts, that's $2,000 a month. If you have 30 contracts, there that's $6,000 per month. So, essentially, you're putting your money to work here, right? You're not just letting it sit in a low-interest checking account, savings account for 10, 15, 20 years, letting it be eroded by inflation, the buying power starts to decline. You don't want that. You want to make sure that you are investing it either in some sort of money market fund, CD, or whatever it is that you're comfortable with, or maybe in ETFs, low-cost broad-based index funds. And if you want that short-term income, you can also attach this strategy, covered call strategy, so that you can collect income in the short term, so you don't have to wait until the next 10, 20, 30 years or so to cash out your portfolio. I know you are most likely going to have a question here where it's like, "Oh, the stock market, some of these stocks that I want to purchase to sell covered calls, it's a little bit on the higher side." And it's okay, because there is actually another strategy where you can collect we can purchase these 100 shares at a lower price and get paid doing so. So, that's what we're going to talk about in the next video. And this is called selling cash secured puts. So, I'm very excited for the next video. So, stick around. Go over this study guide first. Make sure that you understand the mechanics, the mechanism first, and then I will see you in the next video where I talk about cash secured puts. Hopefully, this helps, and yeah, I'll talk to you real soon.