How to Generate $1000 Monthly Income with Covered Calls
Did you know that 71% of options traders focus on covered calls as their primary income strategy? I’ve spent years perfecting the art of generating consistent income through covered calls, and I’m excited to share how you can potentially earn $1000 monthly using this conservative options strategy. From selecting the right stocks to managing positions effectively, this guide will walk you through everything you need to know about creating a sustainable covered call income stream!
Understanding Covered Calls Basics
I’ve gone over the basics of covered calls in this article. But in a nutshell, the idea is that we own 100 shares (or a synthetic position) and then we sell a call against these shares. That means we’re prepared to give up the shares if they reach a certain price; our shares will be “called away”. We can avoid this by closing the option before expiration and buy it back. Or we can let it expire worthless (see my supermarket analogy here), if we think the price is not going to go above our strike price.
We collect income. It’s like an insurance policy that we’ve sold. We sell it for a high price, and buy it back for a low price- or $0 if it expires worthless – and pocket the difference.
Portfolio Requirements for $1000 Monthly Income
The minimum to begin in general is the cost of the 100 shares. If you’re looking at a stock like American Airlines – trading at $17/share – that’s $1700. Or if you want to do it on Meta, at their $700/share price, it’s going to be more like $72,000.
For the purposes of this article, where we want to generate $1000 per month, we’re going to need a stock that’s more valuable or we buy a lot more shares. The other way to do it is to use a synthetic position – a long call that substitutes your 100 shares. I explain this more in this article.
Selecting the Right Stocks for Covered Calls
Ideally we are looking for shares that we want to own because we believe they’re going to go up in value. If the price of shares falls, our covered call strategy will be less effective – it’s better for everyone if the price continues to rise so that our underlying (shares or long call) doesn’t lose value.
We also don’t want the share price to be too expensive. Otherwise we won’t be able to afford 100 shares, or too much of our portfolio is exposed to a single stock.
Most importantly, we want to have decent IV (implied volatility) so that we get to charge more premium for the same risk. But remember that a less volatile stock (or ETF) could work well as there is less week-to-week price movement.
For this example I’m going to choose NVIDIA because I believe the price will still continue to rise in the long term, and it’s $133/share. You can instead buy a LEAPS that expires in a year for around $5000. So our investment is going to be either $13,300 or $5,000 depending on how you run the strategy.
Strike Price and Expiration Selection Strategy
I have explained the difference between selling OTM, ITM and ATM calls in this post. This also compares how each one compares in two different scenarios where the underlying goes up or down. Let me give you a short version here :
When we sell Out of The Money calls, the strike price is above today’s price. That gives us opportunity for the underlying to gain in value if price moves up. The only “risk” is that the price goes above our short strike price. Then we will have to pay back the intrinsic value when we buy back the call. But it’s not really a risk because some of that will be offset by the amount of extrinsic value we collected when we sold the call.
At The Money gives us a nice blend of cushion in either direction, and is ideal if you think the stock is trading sideways. It allows you to collect the most extrinsic value, but your call has a 50% chance of ending up in the money. This means you’ll have to buy it back rather than let it expire.
In The Money is the most counterintuitive because you will always expect the call to end with intrinsic value (which needs to be paid back). However, it has the best downside protection, and highest profitability %. Since it’s more conservative, it also has lower profit.
Let’s be conservative and sell ITM calls. That means we sell a call that’s BELOW today’s price. I know it sounds a bit crazy, but trust me – this is actually the safest way to do it.
Typical Example : NVIDIA
The above screenshot shows the details you need to consider when running a covered call strategy. First, you need to purchase the shares, today their price is $134.48 = $13,448. For selling an In The Money call, it should be lower than today’s price. It sounds crazy, but it actually is still profitable and has a lower breakeven point than doing it any other way. That means the price has to go down to $129 for this to be unprofitable. There is no upside risk. If the shares go to the moon, we won’t incur any losses – although we do cap our profits.
I know it sounds crazy, but selling In The Money calls is actually the safest way to do it.
What happens if we do go down to $129?
Firstly, our shares are now worth $5/share less, so our equity position is going to be worth $12,900 if the price drops to $129. BUT we get to protect this downside move with the credit we received for selling that call. In this example we actually receive $500, so the overall loss will be $0.
If we move below $129, the shares lose value but we get to keep the $500 we collected. The only effect really is that our equity value goes down. If you were prepared to hold the shares in the first place, you should be prepared that they will go up and down in value.
And how does this get us to reach our goal of $1000/month?
You’ll notice that we collected $500 in credit,but the max profit is only $250. That’s because we have $250 of intrinsic value that we’re borrowing when we sell this call. If the price moves down, we don’t have to pay that back. But the down move will also mean that our shares lose value. That’s why we can’t make any more than $250, because using that borrowed intrinsic value basically offsets the loss in the shares.
At its most simplistic, $250/week will get your $1000 per month income.
But we all know nothing is so simplistic.
Probabilities : When covered calls don’t work out.
You will notice on the example that the chance of profit is in the low 70%. That means that 7/10 times you will win, but 3/10 times you will lose. So it’s likely that overall this strategy is likely to be profitable in the long run, but you may lose in the short term.
So if we aren’t going to win 100% of the time, we can’t reasonably say that we’ll get $1000/month for this covered call strategy.
Let’s build on this approach and substitute the shares for a long call. I won’t go into all the details of using LEAPS to run a covered call strategy in this article but I can describe the main differences in this post instead.
Essentially the long call, if it’s deep in the money (80+ Delta), more or less behaves like 100 shares. The benefit is it costs less money to buy than 100 shares. The downside is that it is more sensitive in % terms to ‘price action’ than shares would be. There is a high chance that your call will be worth less than you paid for it at the beginning. BUT you can still extract the same amount of premium from covered calls that you would have been able to with shares.
Let’s begin!
Advanced Covered Call Techniques – Using LEAPS as a substitute for shares
First thing is that instead of shares, we buy a long call at the 100 strike price, one that expires in January next year.
We’re going to sell a call at the 133 strike price. This is slightly closer to the At The Money strike, but we still have a similar breakeven to the downside, $129.
Final thing to note- we now have upside risk. Yes, if the shares go above $151 in the next 8 days, we wil actually lose money on this, but that’s quite unlikely. If you look at the bellcurve in blue on this graph, that shows you the likelihood of the shares reaching that price : there’s almost no chance that NVIDIA will go up to $151.
You can see here there’s a decent profit zone on this trade. The most likely “bad” thing that can happen is the price going down to $129 or below. If that happens, we would book a loss for the week, but we have the same odds of winning next week by setting up the same trade.
But what’s the difference? This looks like the same trade, Will.
Yes it is pretty much the same trade. However the key difference is that we’re no longer required to invest $13,400 in shares. Instead, the price for the call is $4,830. That means that if we reach our goal to make $250 from this trade, that represents 5% of our capital employed.
If one call is $4830 and we were prepared to invest $13400 in NVIDIA for the purposes of selling calls, why not buy 2 calls – which will still be less than the amount required to buy 100 shares.
Here I simulate using two LEAPS positions to run the same trade. Now we can sell 2 covered calls and collect double the premium. I will explain in more depth the LEAPS position in another article because you should understand how they work (and what market conditions they make sense in) before buying them – their expiration date should be very far in the future.
With our two covered calls, we’re now able to collect around $500 per contract, although $200 of that is intrinsic value.
And how does this help us achieve our $1000/month target?
As I explained above, we know that there is a chance that the price will fall below $129, at which point this trade loses money. But there is a 70% chance it won’t. By collecting double the amount of credit every time, we aim to beat the odds and have an expected value of $250 per week.
Let’s break it down.
In the first example, we would make $250 per week, but only 70% of the time.
Let’s say the average loss of a trade was $200.
That means the average weekly income would be ($250 X 70) – ($200 X 30) / 100
= $115 / week.
That’s not bad, it’s still a 44% yield on our $13400 investment, but it would give us $5980 income for the year. Half what we need to reach our goal of $1000 per month.
In the second example, we can make $500 per week, 70% of the time. 30% of the time we will incur our $400 loss (selling two contracts). Our investment was $9,660.
Now our expected profit per week looks like this: ($500 X 70) – ($400 X 30) / 100
= $230 / week expected
So even accounting for the losses, we should still overall gain $230 per week, not that far short of our $1000 per month target.
I want you to understand all the risks of choosing this approach, and that’s why I’ve written this article about risk management using covered call strategies on LEAPS.
And what about the remaining $60/month?
The beauty of selling options is that we can close them early if we want to. Most weeks, we may reach our profit target earlier than the full week, close the position early and then open another one. The result is that we should be able to squeeze more than 52 trades into a year. Let’s say we can add in 10% more trades into the year, bringing us up to 58 trades.
Now for the year we have 58 trades X $230 = $13,340
Or $1111 per month.
Oh, and look – $13340 was exactly the amount required in option 1 to buy the shares.
I hope you’re starting to see the power of this – running the synthetic covered call strategy for a year would earn enough income to buy 100 shares of NVIDIA. Yes, this is a simplified version of looking at it, and there is risk to the downside. Your long call will lose value in % terms more quickly than the shares will. However, the lower investment requirement and higher return on capital makes this a pretty good trade for the conservative monthly income seeker.
Conclusion:
Success with covered calls requires a combination of proper stock selection, strategic option writing, and disciplined risk management. By following the strategies outlined in this guide, you’ll be well-equipped to work toward generating $1000 monthly income through covered calls. Remember to start small, stay consistent, and always prioritize risk management over aggressive returns. Ready to begin your covered call journey? Start by paper trading these strategies to build confidence before committing real capital!
