How to Sell Covered Calls on Dividend Stocks

I am a very conservative investor who primarily invests in safe, stable dividend growth companies. Selling covered calls helps enhance my yield by gaining premium income. Learning how to sell covered calls on dividend stocks has increased my income and returns on my accounts. This works for me, but please do your own research to find what works for you.

I use two different strategies for selling covered calls depending on my goal.

Portfolio Overwriting

The first method I use is called portfolio overwriting. This is for those holdings where you don’t actually want to risk your shares, but you want to gain a little additional income on them.

For these holdings, I strive for a 6% return from the options premium per year, or 0.5% a month. This is a low risk goal that will let you gain some additional income while greatly reducing your chances of having your option exercised. I use this method for my super stable dividend companies that I have a low cost basis on and don’t want to have to sell and rebuy at the current higher prices.

The strike price I pick for these would be a minimum of 10% higher and up to 20% than the current price for each month until expiration. If it is a weekly call I would not go any lower than 7% over the current price. This allows the value of the shares to increase without getting too close to the strike price. This range will typically get you a 0.5% return for the month (or .12% a week).

For instance, if KO is trading at $54, I would look for a strike price around $60.

I personally stick to weekly or monthly expirations as i feel like I can understand the price movements to be expected over that time.

Avoid writing calls during earnings reports and ex-dividend dates.

Covered Call Writing

The second method I use is traditional covered call writing. In this scenario I am ok with my shares being exercised since my main goal is getting the highest premium. This would be for holdings that have not appreciated much yet and your cost basis is close to current price.

This method is just about focusing on the immediate premiums you receive and also a tiny principal increase.

For example, if KO is selling at $54, I would sell the $54 or $54.50 strike price.

This will get you the highest premium but leaves you little or no capital appreciation. In most markets your shares will be exercised and you will sell your holding at the end of the term. You don’t get to participate in any upside, but since you already locked in your income from selling the call, you are ok with that risk.

For these covered call trades, I look for a premium from writing a call of between 2-4% a month.

So if a stock is trading at $25, I would like to get between $13-25 in premium per week that the contract is for.

This, if done consistently, can generate 24-48% annual returns.

If the option is exercised, then you can choose to rebuy the shares and do it again, or pick a different company to buy and sell calls on.

If the option is not exercised, you keep the shares and can write another call.

Either way, you have already received the premium income.

How to Sell Covered Calls on Dividend Stocks

Selling covered calls on your dividend stocks can increase the income you receive to buy more shares or use the premiums to supplement your income. Hope this helps! Let me know what questions you have.