The 3rd scenario

If you using a covered call strategy to generate monthly income, you need to evaluate each stock in your portfolio every month just like in the 2nd scenario. The difference is generally what return are you good with keeping in your portfolio. As we stated yesterday, call premiums change based on several different factors.



As we talked about yesterday if you can average 6% per month and reinvest, the power of compound interest grows your account balance very quickly. If you are taking all or part of the generated income every month you have to think about what % do you want to take out as income every month. If your account balance is $100,000 and you would like to generate $5000 or 5%, you have to think about your asset protection differently. In the first 2 scenarios, you leave you call premiums in the account for the long term which allows you to dollar cost average you stocks over the medium/long term. In those cases when a stock is no longer delivering the call premium you would like it is generally easier to liquidate since your account balance is continually growing. If you have a none performer you can liquadate the position and get into another stock that has a good call premium.

In this scenario since you are more than likely taking most or all of your premiums, you do not always have that luxury. When you are in any type of account to produce long term income, you have to protect your underlying investment. In this case, you have to protect your $100,000. That money is your instrument to generate income.

Lets think about that example. If in the above example you want to take 5% every month, we would suggest targeting at least 7-8%. That will give you the cushion you need to sell stock that you may have a negative balance on and the call premium has fallen significantly. Job number 1 is to keep that $100,000 whole so you can keep generating that monthly income.

Talk to you tomorrow.