For many investors, dividends provide the primary avenue for generating income. While this typically proves effective, there are other ways to get the job done, particularly if you’re an active investor who prefers daily interaction with his or her portfolio. After all, for many of us, that’s part of the fun of investing — spending time, strategizing, and doing everything you can do to achieve your goals.

In this article, we consider how you can utilize options to generate income as you approach or enter retirement. A covered call strategy won’t work for everyone. First and foremost, there are real tax considerations. For some, taxes will be a major concern. For others, not so much.

Many long-term investors have a portfolio of stocks. Again, this can work in isolation, particularly if you’re collecting or reinvesting dividends.

However, if you’re willing to take on a touch of measured risk, you might be able to increase income while you learn a new way to manage your money. In a perfect world, with a large enough portfolio, you might be able to live off of your income or, at least, supplement other sources.

Sample Portfolio

Consider a hypothetical portfolio of five stocks. To make things work from an instructional standpoint, we’ll use round numbers. Alongside each stock, we’ll concisely detail the option strategy we’re using. Below the table, we’ll get into greater detail concerning what’s at play.

*All prices approximate, as of midday, Thursday, September 5, 2019.

Please note that while I pulled live quotes for both the stock and option prices, the price you receive can vary considerably on the basis of several factors. Consider everything you see here approximate numbers and for illustration purposes only.

Based on the table, you’ll produce $1,442 worth of income via covered call writing on AAPL, ALGN, T, and DIS.

When you write a covered call, you receive a premium but run the risk that you might have to sell your stock at the option’s strike price. For example, if AAPL hits $215, your shares might get called. If AAPL goes to $217, you still have to part with your shares at $215. However, the premium you collected ($1.92) helps offset that loss. And, again, your numbers will vary. What you see here depicts how the strategy can function.

The table shows how you can structure a portfolio of stock alongside income-generating covered calls. I have heard of investors writing weekly calls on AAPL consistently. Covered call writing can yield a significant amount of income. It takes time and effort. It requires strategic thinking in terms of taxes and the strike and expiration dates you select as well as how you would feel and what you would do if you had your stock called. But it can be a lucrative strategy, particularly when executed on dividend-paying based on.

In some instances, you’ll do nothing. With liquidity scarce and premiums too low to warrant effort, it simply makes no sense to try and write calls against SIRI stock. At least, not as of this writing. Some positions scream for covered call writing, others not so much.

Finally, if you take this or a similar route, you’ll want to map out your options (in the general sense of the word). Consider everything that can happen and determine your course of action, so you’re ready to move fast.

For example, if your stock gets called, what will you do? You could wait for a pullback and buy it again. You could execute a buy-write strategy right away. With a buy-write, you buy the stock and write a covered call against it at the same time. As in, buy 100 shares of a stock for $100 and write the $105 covered call, collecting a premium of, hypothetically, $2.85. Now the effective purchase price of the stock $97.15.

You get the picture. It’s a case of deciding how much time you are willing to devote to your portfolio and how complicated you want to make your income generation strategy.

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