Can Covered Calls Create a Steady Flow of Income?

Okay, so I’m going make a few enemies with the answer to this one.

There are a NUMBER of self-appointed “gurus” out there that will tell you that it’s possible to to set up a reliable, like-clockwork investment plan for income by buying stocks and selling covered calls against them. Many of these gurus imply or even outright guarantee a 3-6% per month “income stream” from such investments.

Many snake oil salesmen and sales-women… and even a few sincere but inexperienced and unproven characters as well… somehow keep this untruth alive. I’ve even heard it said (by a well respected, and supposedly conservative guru-ette) that a covered call is a “synthetic bond”, producing a reliable living income for seniors if you simply follow her step by step plan.

Want to protect your portfolio/401K from market downside?
yet still benefit from market upside
Sign up now for the free Sketch


The reason that I say that I’ll make a few enemies is actually surprising… I don’t think I’ll actually catch the flak from the gurus themselves, but from their FOLLOWERS.

True story. Because the “reliable flow of monthly income” myth that they propound is so attractive and admittedly downright SEXY… that people WANT to believe it. And when they fail, either the guru… or the followers speaking to themselves… excuse the failure by saying “you didn’t follow the system correctly”, “you must have done something wrong”, or my personal favorite:

Learn how to profit from winner stocks
and protect yourself from loser stocks
Download free Trade Simulator now

“Come to this ADVANCED, MASTER, EXCLUSIVE, fill-in-the-blank, this-will-finally-solve-the-problem SEMINAR to learn how to do it correctly in THIS market.”

Yeah, right. After dropping three grand with the flawed idea, let’s go spend another five grand to find out why it isn’t working. Listen. The MARKET itself will be giving you an education.

See, when dealing with the topic of personal finance… people treat it like any other category. Be it politics, religion, child-rearing… you know what people believe? They believe exactly what they are LED to believe. They believe exactly what they WANT to believe.

People in general decide what they want to believe FIRST, then go looking for the evidence to support their desires rather than search out the naked truth. Sorry, but that IS the naked truth.

I dunno about you, but I’m tired of seeing people get taken advantage of by this misconception: that the markets somehow act as a cash dispensary and that anyone with a weekend’s experience can learn to operate it that way. I’ve sent more than a few folks away angry from just by endeavoring to tell them the truth: that a reliable, predictable monthly flow of income from selling covered calls is a pipe dream.

Learn to trade like the pros
Signup for free Webinars now

Let’s do the math… 3% per month is 42.5% per year… year after year. That’s what you would have if were to compound your stock earnings… Oh, and 6% per month is over 100% per year. Surely you can look around a crowded room at $5,000 a head and realize that SOMEONE is making serious bank. More than enough to live on. So why not live on just a portion of that income alone, and stuff as much capital as possible into an ongoing, double-your-money-every-year plan? It only makes sense.

Still believe that covered calls is a good way to receive income in all markets? Okay, that’s your privilege. Now… ask your guru to show you the numbers. I mean, cough it all up. Not just the cherry-picked “look what our subscribers did with THIS one”… but ALL the numbers. Show the stocks being held today, and their cost basis. At what price did we receive this little income generators, and what price are they NOW? In a bear market, covered call selling for monthly income will give your guru a net loss. When you count up what they spent for those stocks… and compare that with what you can get for ’em today… you’ll find that this idea has a fatal flaw.

Well, what about in a rising market? Hmmm… let’s examine the present value of stocks that were called away, and compare whether it was a good idea after all to set them free for a 3-6% return.

Here’s the deal: if you need monthly income to support your retirement, use the kinds of instruments that will support that goal. A fixed income stream can be had by buying bonds. A tax-free income can be done for most people (believe it or not, some SENIORS will be actually be disqualified) by buying municipal bonds. You can achieve a reliable, known monthly income by “laddering” your bond holdings: allocate your capital among a number of bonds that mature at different dates.

At this point a lot of folks will be sputtering and saying, “BUT..! The bond yield is too low… I can’t LIVE on that!”

Yeah. I know. That’s a sign that you need to put away more capital.

Listen, I’m going to give a hard pill to swallow, but it’s the truth: The stock market is NOT a place to earn a reliable income for your retirement. Instead of blowing smoke up your you-know what, how about I tell you the truth? The stock market is for those that want to take advantage of market fluctuations to GROW a stake of capital.

I’ll give you a step-by-step plan to success in this arena if you want to know how really to succeed:

FORGET a monthly stream of income from the stock market. You have a job or a business to help you do that. Render service to others, charge fairly for that service and you will have an income stream.

DIVERT some of that income stream and you will have savings.

INVEST those savings in the stock market with sound money management principles… risk only 4-8% of capital in each single trade by using stop orders or put options.

SIZE each particular trade properly… this is important… so that only 1% of your overall portfolio is AT RISK in each trade. That is, if you have $100K to invest, you might put $20K of it into a particular stock with a 5% stop (this tight of a stop can be achieved with put options) resulting in a $1,000 risked amount. $1,000 is 1% of $100K.

GROW your account by cashing in the winners at 2X your risked amount, and cutting your losers before they can risk more than 1% of your capital.

Finally… the last step to actually accomplish what the covered call gurus want you to believe that you can do without following all these steps…

DEPOSIT the huge amount of capital that you amass (after years of trading correctly) into bonds, annuities, or some other instrument that IS designed to give you an ongoing, low risk income.

There it is. Now God help me… since I’ve dared to speak the truth… I hope that what I’ve written here makes a dent. Here’s a crazy idea: if you are thinking to yourself, “I can’t retire on the capital that I have. I NEED 3% per month to make it work, NOT the 1/2% or so I can get from bonds…”

Well, just get yourself a stash that’s six times as big. That’s the solution. and you CAN accomplish that solution by keeping your losses low and letting your winners run… consistently… and taking advantage of the stock market using it the way it was meant to be used: by capitalists willing to put up money responsibly to finance big business. And grow your capital.

Okay. As I said before, God help me. I’m ready to hear your posted replies.

About Kurt Frankenberg

Kurt Frankenberg is an author and speaker about entrepreneurship, martial arts, and trading the stock and options markets. One of several "Biznesses" he founded as a teen, The Freedom School of Martial Arts, has been in continuous operation since 1986. Kurt lives in Colorado Springs with his wife Sabrina, German Shepherd Jovi, and his ninja cat Tabi.