Buy-and-hold investing has gotten a bad rap during the last few years, as stocks got kneecapped and retirement accounts got chopped in half, and in half again.

Dividend-paying stocks haven’t provided much refuge, either. Amid layoffs and budget cuts, once-thriving companies were forced to reduce and even eliminate their monthly, quarterly or annual rewards to loyal shareholders.

Lately, it seems the only people banking bonuses in the markets are the ones with corner offices on Wall Street. But you don’t need to be a broker to get paid to trade. In fact, you can make a healthy, livable income from your existing portfolio.

Best of all, you don’t have to wait until you’re living off your nest egg to use it to generate regular returns, whenever you want them!

Easy Income in 10 Minutes a Month

Covered calls are also called “buy-writes,” but there is actually a small difference. A buy-write means buying the stock and selling the calls against it right away. The covered call was designed to help you to collect premium when capital appreciation is practically nonexistent.

Remember, you can sell calls against your stock at any time. In fact, if the stock starts going up, buy back your short calls and enjoy the upside! Here are three secrets to a successful strategy:

Secret #1: Make your dead-in-the-water stocks work for you

Don’t dump your dead-in-the-water stocks – make them work double-time for you instead!

In the covered call strategy, you sell call options against your existing stock position in a 1-to-1 ratio. You can use a stock like AT&T (NYSE:T), which hasn’t moved much in the past few years after getting a nice bump from its once-exclusive iPhone deal with Apple (NASDAQ:AAPL). Then you sell (“sell to open”) one call option contract for every 100 shares of AT&T that you own.

The covered call strategy isn’t for every stock in your portfolio. It’s for the ones you can’t bear to let go of because you’re still bullish on them. If it’s taking a long time for them to break out of their trading range, this strategy puts money in your account while you wait for the next leg up. (Say, like AT&T’s recent takeover of T-Mobile, when the announcement gave it a nice, albeit brief, 50-cent boost from its $28 price.)

Secret #2:  Look for front-month, at-the-money options

The covered call strategy works best with front-month, at-the-money options. Let’s break that down a bit:

“Front month” options are those that are coming upon their expiration date at the end of the current or next month. Standard options expire on the third Saturday of every month (although your last chance to trade them is Friday afternoon when the markets close for the weekend).

And if you’re looking at the new class of weekly options (which are only available on a couple dozen stocks right now, but that list grows regularly), they expire at the end of every week. Whichever you choose, however, you don’t want to sell too much time.

Secret #3: “Selling Time” is best done at-the-money option

“Selling time” is best done at the at-the-money option, which is the one with the strike price (or, exercise price) closest to the market price of your stock. With AT&T at $28, the call option with the $28 strike is considered to be at-the-money.

At-the-money options have the most “extrinsic value,” or amount of value that decays with time. This is a good thing (to quote Martha Stewart), because as the option seller, you are counting on the option losing value after you’ve made your trade.

The takeaway here is that extrinsic value goes to zero on expiration day. That’s the money the option buyer unsuccessfully risked and that you’ve banked!

The idea behind the covered call strategy, then, is to sell the option with the most amount of eroding value. That is why you don’t want to be in the position for too long, and it benefits you to use a stock that is stuck in neutral.

Another tip: If your stock is at $28.50 and you have your choice between the $28 strike and the $29, it may be to your benefit to sell the out-of-the-money $29-strike calls. You will probably collect less money upfront (as of this writing, the $28s are at 50 cents and the $29s are at 10 cents), but the odds of the option expiring worthless are slightly improved.

For my money, I’m more interested in the “reasonably sure thing” than the bigger-potential returns, especially if I’m counting on the returns as regular income.

How it Works

With AT&T, let’s say you own 1,000 shares, with a current value of $28,000. That’s a lot of money taking up space in your portfolio with hardly any return.

To implement this trade, you’ll tell your broker that you want to “sell to open” 10 contracts of the at-the-money calls. Let’s use the $28’s that expire in a few weeks, with a current value of 50 cents.

In other words: 1,000 shares @ $28 = 10 call contracts at the $28 strike.

This means you collect $50 (50 cents per share x 100 shares in a contract) per contract. Multiply that by 10 contracts, and you get $500 in your account (before commissions). That cash is yours to keep.

Do that over and over again every month while the stock stagnates, and you don’t have to worry about whether or not your boss is going to give you a raise.

Note: A little bit of volatility gives a boost to option premiums. The at-the-money options for AT&T surged to 65 cents when the T-Mobile announcement hit the wires, before retreating to 50 cents just a couple days later. While the covered call strategy is one you will usually do independently of market events, it can also help you to take advantage of them.

Protection Under the ‘Cover’

One last tip: This strategy works best when it’s done repetitively. Don’t short longer-dated call options – you could collect more by selling month to month than shorting a more-expensive call that has more time till expiration.

Another benefit to selling month-to-month (or week-to-week) is that you can easily adjust the strike price to mirror the stock if it moves.

So, what if the stock does move?

Covered calls aren’t for “movers and shakers.” You’re better off using your stocks that are trading in a range but that are slowly moving upward. If you’re not longer-term bullish on a stock, the covered call isn’t the right strategy for the situation.

The great news is that the strategy is effective not only when the stock stands still, but also if it moves up a bit or even down a bit.

Ultimately, you want the stock to go up. So if AT&T does add a few pennies between now and expiration Friday, you’re still in a good position. But if it takes off and runs, you risk having the call “assigned” and your shares being sold at the $28 strike.

If that happens, you can buy the shares back at the market price, but you probably want to stay away from the covered call strategy with this stock, at least in the short term.

If the stock falls, you’re “covered” up to the amount you collected from the call. If your stock drops to $27.40 and you collected 60 cents, you’ve broken even. Anything below $27.40, though, and the position is no longer hedged.