I have always loved the stock market and have been an/on off investor since online investing became available to retail traders. While I knew how to buy & sell stocks. The options & futures world was always that unknown frontier that that I would admire from afar but too scared to venture into. When the pandemic hit, like a lot of people, I spent some of my new quarantined time in the market but this time I felt bold enough to go and test some new concepts. I spent 7 months learning everything I didn’t know about options and futures. I learned new ways to trade, joined trading groups and after some success, committed to Day Trade every day of the year for the next 12 months so that I could say I experienced everything under the sun when it came to trading.
I lasted about 5 months with day trading before I threw in the towel. While I learned some things that helped me make money quickly, I also learned some things that helped me lose money just as quickly. There were 3 things I did not totally appreciate before starting the challenge:
- My time & availability for trades
- My risk/reward ratio
- My ability to control fear or greed when I was buying or selling a trade.
Not having a good constancy in these areas caused a lot of emotional roller coasters and I took a break from trading for a good 8 or 9 months. But though it all there was one concept that kept pulling me back in and that was selling Covered Calls. When it comes to trading Options, Covered Calls are are probably the least exciting and smallest of the risk/reward but after my previous experiences of highs and lows, that helped me to ease back into the market and stay consistent with fundamentals.
(If you are not familiar with the concept there are plenty of videos that can explain it better than I can. The basics of Covered Calls are if you own 100+ shares of a stock/etf and commit to selling those shares at a certain price, you can sell that commitment as a contract and in exchange you get paid a premium)
Even with Covered Calls you still must factor in time, risk tolerance and emotions but it is more straight forward to set rules to abide by and so far in have had way more stress-free days/months than I did with day trading. I wouldn’t call this my side hustle yet because I am not earning a significant amount, but it is consistent and does not take a lot of time. 1hr per week has been translating to an extra 4% return each month.
So, if you are a buy and hold stock person who wants the ability to enhance your dividends or buy a few extra shares each month then get your toes wet with some covered calls. Here are the rules I follow for consistency and momentum building:
- When possible, I set this up in a tax advantage account – I won’t have to worry about short term capital gains.
- Sell contracts for more than my cost basis – I will make guaranteed profit by keeping the premiums earned and selling my shares for a profit.
- If my 100 shares get sold, I buy back 101 shares – I will make sure I don’t lose profit because of the sale.
- Use the premium collected to buy more shares – if I don’t have enough to, I will let the premium sit as cash until I have enough to buy more shares.