Get Rich with Dividends: A Proven System for Earning Double-Digit Returns

Covered Calls: The Espresso of Income Investing

Investing in dividend stocks is like a good strong cup of coffee for your portfolio. It puts a little giddyap in your finances and helps you achieve your goals. Just like a cup of coffee gives you a jump start in the morning.

Some people need a little bit more help, particularly in the afternoon or maybe at night if they’re going out. So rather than a cup of regular coffee, they kick it into overdrive and order an espresso.

A regular cup of coffee really doesn’t do much for me. A shot of espresso, however, is like rocket fuel. I’m raring to go.

That’s what a covered call is to your portfolio. It’s like a shot of espresso to increase your returns.

Covered call: When an investor owns shares of a company and sells a call option against those shares, in effect agreeing to sell the shares at a predetermined price by a specified date at the call buyer’s demand.

When an investor sells a covered call, he already owns the stock he is selling the call against, and agrees to sell the stock to the call buyer at the strike price (the specified price) by a certain date.

So going back to our Microsoft example, if you own the stock at $26 and sell the January $30 (the strike price) call for $1 (per share), you will have to sell your stock to the call buyer for $30 by the third Friday in January if she exercises the contract (demands it).

Let’s assume that it is July, so January is six months away. Let’s look at some scenarios.

Best-case scenario. ...