Well, I think of large-cap blue-chip companies as those stuffed animals. They surround my portfolio so I can sleep easy at night.
They can also be really boring, though. Worse, sometimes they can also be stagnant. So I devised a method where I can generate some nice, safe income off of my positions in these nice, safe stocks using covered calls.
Big, blue-chip stocks will often move the most right before and after earnings reports, barring any other huge news coming from a company. That’s a great time to sell some covered calls, either against your entire position to benefit from the lower per-contract commission, or part of your position in case the stock gets called away. The beauty of this strategy is that it’s rare for the stock to get called away, and if it does, you can always buy it back — probably for not much more than it got called away for.
Now, one thing to be aware of if the stock gets called away is that it becomes a taxable event. If you own a stock from much lower prices at it gets called away, you might trigger a large capital gains tax situation. Of course, if you want to avoid that problem, simply buy back the option.
Let’s look at three examples of income-generating covered calls.