Are you a woman nearing retirement with stocks just sitting idle in your accounts? It might be time to explore the power of covered calls. This popular options strategy can turn your dormant assets into a potential income stream, a valuable tool as you prepare for retirement.

What is a Covered Call?

A covered call is a trading strategy used to generate income from stocks in a flat or slightly down market. It involves holding a long position in a stock, (Owning stock) and selling call options on that same stock to generate income.

To implement a covered call strategy, you sell call options on a stock you own. This is giving the buyer the right to purchase your stock at a predetermined price (known as the strike price) on or before a specified expiration date. In exchange for this right, the buyer pays you a premium.

If the stock price remains below the strike price, the buyer will not exercise their right to buy the stock, and you retain the premium as income. However, if the stock price rises above the strike price before the expiration date, the buyer will likely exercise their right to buy the stock from you. This obligates you to sell your stock at the strike price, even if the market price is higher.

The Potential of Covered Calls

There are numerous benefits to employing a covered call strategy. Covered calls can generate income even when the market is flat or slightly down, which is a boon during uncertain market conditions. They also enhance your returns by reducing your cost basis in the stock. Moreover, they provide a level of protection against downside risk.

It’s worth noting that you are giving up some potential upside in your stock position by selling call options. However, this is usually offset by the income received from selling the options.

Look at it this way. If today, the stock I own is selling for $125 and you came up to me and said, “Hey, would you like to sell me your stock for $127 a share?” No brainer, right? Your stock is currently worth $125. For the stock to reach $127 it would have to rise 2% in 30 days. That could happen, but statistically, 24% growth a year is an outlier, right? So we can assume your stock won’t appreciate 2% in just 30 days. Now, I say to you, “I don’t want to buy that stock today, I’d like you to hold it for me. I’ll come back in a month and decide if I still want to buy it at $27.” You would say, wait a minute. Why should I hold my stock for you for a month? and I say, “Well, I will pay you $2 a share, to hold this option for me.” If in 30 days, I don’t want to buy the stock from you, because it’s not worth at least $127, then you keep the $2 a share. 

And that is how you make money on stocks you own without having to sell your shares. Of course, the price of your stock may go up 2%, after all, the buyer of your calls thinks it will, right? If it does, you will have your shares called away, and you will review the payment of $127 a share, and keep the $2 a share as well. 

Risks and Considerations

While the benefits are enticing, it’s essential to understand the risks. If the stock price rises significantly, you will be obliged to sell your stock at the strike price, limiting your potential profit. If the stock price falls, the options premium may not offset your losses, resulting in a net loss on your position. This is why you should only run this strategy against stocks you already planned to hold long-term through any ups and downs of the market. 

Moreover, implementing a covered call strategy requires that you own shares in increments of 100, and these shares can be in regular cash accounts or IRAs. This is an essential consideration if you’re planning to use this strategy for retirement. 

Covered calls can seem complicated and they do require careful monitoring. That being said, with careful planning and a bit of patience, they can be a useful tool in your retirement strategy, especially if you have dormant stocks in your portfolio. One way you can practice is by paper-trading the strategy in a platform like Tradingview or Think or Swim, by TD Ameritrade. Build a portfolio of stocks you hold, and practice selling calls against them to see how the process works. 

Here is a great video from TD Ameritrade on the topic.

Conclusion

Dormant stocks sitting in your accounts have the potential to serve you better, especially as you near retirement. Covered calls could be the strategy that helps you generate additional income and enhance your returns, preparing you for a comfortable retirement.

For more information on managing your retirement savings, we invite you to read our next article titled “Navigating Your IRAs: A Guide to Handling Retirement Accounts from Past Employers.” This resource is specifically designed to help you understand what to do with IRAs from every time you’ve left a company and rolled out your 401k.

Navigating your financial future may seem daunting, but by leveraging strategies like covered calls and making smart decisions about your IRAs, you can feel more confident about your journey to retirement. If you have cash in a brokerage account waiting to invest, you can look at selling cash secured puts as an income strategy or a way to purchase stocks you want to own as a discounted price. Click here to read my guide on Selling Cash Secured Puts.