One of the best ways and easiest ways to create income is to sell covered options. Many people use Robinhood for trading. I am going to be showing you how to sell covered calls on Robinhood against 100 shares of a stock that you own.
Selling covered calls is a low-risk strategy, but there is always a risk. The two risks you have are that the stock may lose value and that you could lose potential profit on the upside. Ideally, you found a stock that doesn’t have too much volatility and that makes sense for your overall portfolio.
Basic Steps to Selling Covered Calls
And I’m going to take you from scratch. We’re actually going to buy 100 shares of a stock, and then I’m going to sell covered calls against it. And I’m going to walk you through the entire process. So, what we’re going to do, I’m going to go to stock, SNDL: Sundial Growers. And this stock I’m going to make a purchase. I want to do it in 100 share increments.
We will do 300 shares of this stock. So, I’m going to go ahead and put in 300, review order, and we’re going to buy. So, I just purchased 300 shares of this stock. Now, what we’re going to do, we’re going to go down to this button here and say trade SNDL options.
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To sell covered calls against the 300 shares we now own, we’re going to sell, we’re going to click on the sell tab. We’re going to make sure this call tab is clicked. And then what I’m going to do is I’m going to go out to February 26th. I just want to do this at the end of the month. And we’re going to go and say, we’re going to pick this $2. This is saying, if it goes from a buck 51, which it’s at now, to $2, we will collect, looks like the credit of about 25 cents. We’ll hit continue.
I want to do three contracts because I own 300 shares. So, I’m going to do three contracts. I’m going to put in 0.25. I’m going to hit review, submit, and there we go. They were just filled. So, essentially, I just bought this company and it’s Sundial Growers, and we now own 300 shares of it. It was about a buck 50 a share.
So, that was about a $450 investment into our portfolio. And what I plan on doing is I plan on just selling covered calls against this. So, on a $450 investment, I’m going to be getting a credit. This is only for about three weeks out. So, probably go forward, I’ll start, once this expires and I collect my $75, I will go ahead and probably just continue doing this every month and rolling it and continuing to sell covered calls against this position.
So, anyway, that’s the strategy and it’s called selling covered calls. You buy at least 100 shares of stock because every contract is 100 shares. So, essentially, if you own 100 shares of a stock, you can go through this process and sell a call. And what it’s basically doing is it’s saying if this stock goes from a $1,51 or wherever I bought it and it jumps up over $2, I’m taking on the obligation, basically, to sell my shares away to the option buyer who bought the call option.
They’re paying me a premium for that right to take the shares away from me at $2, if it ever hits $2 by February 26th. So, that’s what’s going on. So, I got paid a premium to take on that obligation to sell these 300 shares if it goes above the strike price of $2. So, I’m collecting $75.