- 1). Buy 100 shares of stock - In order to sell a covered call, you must own 100 shares of the underlying stock. If you sell a call without owning these shares, you are exposing yourself to a tremendous amount of risk. Writing covered calls is a useful technique to reduce risk; not increase it.
- 2). Immediately sell 1 call (on the stock you just bought) - Many online brokerage accounts (like thinkorswim.com) will allow you to buy 100 shares and sell 1 call simultaneously. You will receive the premium income in your trading account as soon as the order is filled. Writing covered calls allows you to generate consistent monthly income.
- 3). Wait until the expiration date to determine your next step - If the price of the underlying stock rises above the strike price, you will be called out and will receive your investment (100 shares times the strike price) back. If the price of the underlying stock does not go above the strike price, you will not get called out. In this situation, you keep the premium income and still own the underlying stock. Writing covered calls is not a hard technique to learn but is extremely difficult to master.
- 4). Review Your Options - If you are called out in step 3, find another company and repeat the process. If you are not called out, sell another call on the stock you still own.
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