How to increase retirement income with covered calls - MarketWatch

Covered option income

Tax implications of covered calls

Options Trading Basics Uncovering the Covered Call: An Options Strategy for Enhancing Portfolio Returns Selling covered calls is a neutral to bullish trading strategy that can help you make money if the stock price doesn't move. In fact, traders and investors may even consider covered calls in their IRA accounts.


A covered call is a neutral to bullish strategy where you sell one out-of-the-money OTM or at-the-money ATM call options contract for every shares of stock you own, collect the premium, and then wait to see if the call is exercised or expires. Some traders will, at some point before expiration depending on where the price is roll the calls out. To create a covered call, you short an OTM call against stock you own. If it expires OTM, you keep the stock and maybe sell another call in a further-out expiration.

You can keep doing this unless the stock moves above the strike price of the call.

Write Covered Calls to Increase Your IRA Income

When that happens, you can either let the in-the-money ITM covered option income be assigned and deliver the long shares, or buy the short call back before expiration, take a loss on that call, and keep the stock. Say you own shares of XYZ Corp. There are several strike prices for each expiration month see figure 1.

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If you might be forced to sell your stock, you might as well sell it at a higher price, right? Some traders take the OTM approach in hopes of the lowest odds of seeing the stock called away.

From covered option income Analyze tab, enter the stock symbol, expand the Option Chain, then analyze the various options expirations and the out-of-the-money call options within the expirations. For illustrative purposes only. Past performance does not guarantee future results.

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As long as the stock price remains below the strike price through expiration, the option will likely expire worthless. As the option seller, this is working in your favor. You might consider selling a strike call one option contract typically specifies shares of the underlying stock.

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If the call expires OTM, you can roll the call out to a further expiration. Keep in mind that the price for which you can sell an OTM call is not necessarily the same from one expiration to the next, mainly because of changes in implied volatility vol. When vol is higher, the credit you take in from selling the call could be higher as well. But when vol is lower, the credit for the call could be lower, as is the potential income from that covered call.

Overview of tax issues

Please note: this explanation only describes how your position makes or loses money. Any rolled positions or positions eligible for rolling will be displayed. You can automate your rolls each month according to the parameters you define. But if the stock drops more than the call price—often only a fraction of the stock price—the covered call covered option income can begin to lose money. The bottom line? If the stock price tanks, the short call offers minimal protection.

Considering Covered-Call Writing for Income in Retirement? Beware the Risks.

Select Your Strikes Accordingly Notice that this all hinges on whether you get assigned, so select the strike price strategically. This is about as old-school as you can get. If the stock hits that resistance level and holds steady until expiration, you might hit your full profit potential for that expiration period.

For example, a call with a 0. Weighing the Risks vs.

Covered Calls Explained

Benefits You might be giving up the potential for hitting a home run if XYZ rockets above the strike price, so covered calls may not be appropriate if you think your stock is going to shoot the moon. Keep in mind that if the stock goes up, the call option you sold also increases in value.

What happens when you hold a covered call until expiration?

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First, if the stock price goes up, the stock will most likely be called away perhaps netting you an overall profit if the strike price is higher than where you bought the stock. A covered call has some limits for equity investors and traders because the profits from the stock are capped at the strike price of the option. The real downside here is chance of losing a stock you wanted to keep.

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Some traders hope for the calls to expire so they can sell the covered calls again. Others are concerned that if they sell calls and the stock runs up dramatically, they could miss the up move.

Options Overview of tax issues The following discussion is a broad overview of some of the tax issues that investors who use covered calls should be aware of. Any information contained herein is not intended to be tax advice and should not be considered as such. Tax laws relating to options in general and covered calls specifically are subject to change, so you should seek the advice of a tax professional to make sure you are complying with current IRS regulations. The information provided in this section is a summary of only a few points discussed in publications by The Options Industry Council.

Covered calls, like all trades, are a study in risk versus return.