Combining Covered Calls With Dividends
Combining together the strategies of dividend investing and covered call writing can be a great income investing strategy. So, what are dividends and covered calls, and how can they help?
High dividend paying stocks are simply stocks which their companies are paying a portion of their profits to their shareholders. By holding these stocks you can get a somewhat consistent income off of the stock market without taking on any additional risk.
That makes dividend investing very popular, but there is another method of making a cash flow off of a stock that you own which is even more powerful.
Writing covered call is more profitable, but it does come with some additional risk. Whenever you sell a call on a stock that you own you are giving another investor the right to buy your stock from you at a specific price at or before some point in the future.
So if you sell the $40 call you will be obligated to sell that stock at $40 sometime in the future if the buyer of that option should choose. Of course call options do eventually expire letting you sell them over and over again. And considering you can make as much in 1 month of selling calls as you could from dividends in a whole year it can be very powerful.
Of course not everyone is comfortable with this strategy. After all it could potentially make you miss a huge move in the stock if you sell a call right before the stock takes off. But that is the risk that comes with this investment. On the other hand if you are more geared to getting consistent money then shooting for one big gain this strategy can work very well.
These are both great strategies of investing in the stock market, and they can easily be combined. By getting into strong dividend stocks and selling covered calls on those stocks an investor can create some passive income in the stock market.
Tags: Covered Calls and Dividends, Covered Calls With Dividends
This entry was posted on Tuesday, December 1st, 2009 at 12:37 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.