5 Takeaways from “Covered Calls for Beginners”

“Covered Calls for Beginners” by Freeman Productions is what I needed for my mind to comprehend options, exactly. I read a massive book on options about four months ago, but I was still confused. 

This book focuses on just one simple strategy for trading options—covered calls. Covered calls are a Tier 1 (I’ll explain tiers later) options strategy, meaning even a beginner can employ these techniques. Since I am a beginner, this book is right up my alley.

The “covered” in covered calls means that you already own the 100 shares of the stock in question. Each option is a group of one hundred of the same stock. With more complex options, you can write them without owning the underlying stocks.

If the option gets assigned, you would have to buy the stocks to transfer to the option owner. Anyways, writing a covered call means that you own 100 shares, and if someone exercises your option, you can transfer the shares immediately. 

In a nutshell, you will be the seller of the option to a counterparty. You are betting that the stock will not gain in value to the strike price of the option. You WANT to keep your 100 shares, as well as the premium the counterparty pays you. I’ll go more into the setup in a separate article, but I’ll give a quick example and then get into my five takeaways.

Let’s say I have 100 shares of AT&T. The current price of AT&T is $30, so I write a covered call to a counterparty with a strike price of $32. The premium I receive is $0.20—so multiply that by 100, and I have $20 total premiums that I receive. If the price never reaches $32, I keep the $20 and do the same thing next month. That’s the simplified version, but you get the jest. 

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1) My favorite takeaway is the term “Synthetic Dividend.” I love this word, and it makes the book 100% worth the read just to use it for the next 30-40 years I have left writing articles. 

2) A synthetic dividend is a forced dividend from using options. In the above example, I forced a $0.20/share dividend on my AT&T stock. Using covered calls can allow you to force dividends, even when the stock is trading sideways.

3) Don’t get greedy if you are an investor. The goal is to keep your “long” stock position (my 100 AT&T shares) while keeping the premium.

4) You can make more money by picking a strike price closer to being In The Money (say, $30.50 from the above example), but you risk having to sell your 100 AT&T shares.

5) Even if you have to sell and transfer your shares, you still walk away with the premium and capital gains from the 100 shares. So, it is a win-win. You only lose your long position, which may have been building good capital appreciation. 

You will want to run covered calls once you have 400-500 shares in a long position. I have a few long positions over 100 shares; however, I spread them across multiple brokerage accounts. I think I can start writing covered calls roughly a year from now.

I am excited that they have these in-depth books on options techniques. They can be very complex, but I believe I can get a handle on them by reading these one-off books. If you are a long-term investor, writing covered calls may be an excellent method to juice more income from your static positions. I am building myself up to do just that. I highly recommend this book, just for the word “Synthetic Dividend.” 

Just kidding, this was a fantastic read, and it also goes into the history of options trading and some technical analysis. I read it through Kindle Unlimited. 

This link is to a physical product. The link above is to the digital book. Sorry. I get no credit for digital product links.

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