Covered Calls, Dividends & Passive Income

I am a novice at this so my initial strategy will be very conservative.

As I mentioned in my Results for May-2008 post I wrote a covered call on some Microsoft stock I owned as a way to generate some additional income. I selected Microsoft because I was thinking of selling my shares anyway. I’m short-term neutral on this stock. It’s a channel stock, meaning it has been trading in a tight range for a while, in this case $27-$30 for a period of about 3-months.

1. On May 21^st I decide to write 2 Microsoft (MSFT) June 19 calls. Here is how the transaction went down:I had 200 shares of Microsoft (MSFT) in my account. So through my ShareBuilder® account at ING Direct I went to the trading page and selected “Write a Covered Call”. I entered the necessary information about the stock and the option I wanted to sell in this case the symbol was .msfqb I wrote 2 calls and executed the order.
2. The premium for the June 19 Call with a strike price of $29 was $0.70 so I received (200 * $0.70 = $140). After commissions of $11.95 ($9.95 for the call and $1.00 per contract) by final premium was $128.05.

That’s it! The $128 was immediately deposited into my account. I’m hooked!!

If I got called out (meaning the stock closed above my option strike price), great it would free up some cash, if not I collect the premium and can write another option. I did not expect a big break to the upside or downside. The stock is not that volatile and trading near its lows. I am still long term bullish on MSFT. I will continue to dollar cost average some money into it each month.

I will be tracking my results with covered calls. I hope to write at least one call per month either on stock I currently own or by doing a “Buy Write” on a stock that offers a good premium. I am sure there are many other people who have a lot of experience with call writing any comments or advice would be greatly appreciated.

So here is my starting point in terms of passive income and please don’t laugh too hard.

May 2008

• Interest Income: $4.39

• Dividends: $0.00

• Covered Call Writing: $128.04

This is the first time I have ever taken a look at what type of passive income I can generate on a monthly basis and I’ve realized I have a lot of work to do. Two things in particular stand out:

1. Upgrade my statement savings account (that interest is terrible)
2. Concentrate on Covered Call writing.

The $128.04 came from writing a call on 200 share of Microsoft I own. I had been thinking of selling this stock, but decided to write a call instead. This was the first covered call I ever wrote and if I can generate this type of extra income I’m hooked. Surprisingly writing the call was very easy. I’ll write more about how the transaction happened and some specifics in a future Blog post.

As you can see none of my stocks paid dividends in May. Actually Nucor did, but since that’s a new stock in my portfolio I missed the ex-dividend date. June is the quarter end so I should have some income in that column next month.

If you ask people how they define passive income you’ll probably receive many different answers. There are very few sources of true passive income where you sit back, do nothing, and let the checks roll in. Almost all forms of investment require some work to select, set-up and monitor. There are only sources of income that are more passive than others.

Passive income can come in many different forms probably the most common are:

• Dividends
• Interest Income (savings accounts, bonds, loan interest, etc.)
• Covered call writing
• Income from Royalties (copyrights, patens, etc.)
• Rental Income
• Online click revenue

What do all of the above things have in common? Cash Flow… These investments generate money from money. Most of the popular authors like Robert T. Kiyosaki, author of the Rich Dad Poor Dad series espouse the idea that if your investments are not generating cash then it will be more difficult to achieve financial freedom. The only real difference is how these authors think you should go about achieving cash flow. Debating the merits of each is not the purpose of my Blog only that I want my money to work for me so I don’t have to work for someone else.