passive income 21, Passive Income

Everyone wants more passive income. What's not to like? You do nothing and collect income. Get enough passive income working for you and you find yourself in the enviable position of having all your days free so you can do whatever you want, while your investments and passive activities generate income for you. Heck, you can even make money while you sleep! At least, that's what it says in the brochure. ;-)

Traditional passive income sources include real estate, oil wells, vending machines, network marketing businesses, etc. There are many kinds. But there is also a zero inventory, highly liquid kind of passive income opportunity: writing covered calls on stocks you own.

True, you'll need some shares to implement this strategy. But if you have enough shares you can live off the dividends and call premium you'll be generating.

How Much Can You Make?

Bazillions. Well, maybe not that much. More like 1%/month if you take a disciplined, conservative approach. That's 12%/year, which could be enough to live on depending on your monthly income requirements and size of your investible assets. Here's how much monthly income you could generate at 1%/month:

Investible Assets Annual Return Monthly Income
$50,000 12% $500
$100,000 12% $1,000
$250,000 12% $2,500
$500,000 12% $5,000
$1,000,000 12% $10,000

So, if you need $5,000/month to meet your monthly expenses you'll need $500,000 of investable assets if you're earning 1%/month. The beauty of a system like this is that you can start small and grow it over time (see article on compound interest). You can start small (keep your day job) and when the income is large enough you can live on it full time.

Passive Income From Selling Call Options

Let's imagine you're going to invest in large cap dividend paying blue chip stocks that have an average dividend yield of 4%. That means you'll need to make 8% or more (per year) from the call premiums you sell. Let's look at some examples that meet those requirements for the January 21 expiration (Annualized Return % includes dividends if there is an ex-dividend date prior to option expiration):

Symbol Stock
Moneyness Annualized
Return If Flat
NUE 39.62 36 35.97 9% ITM 13.0%
ABT 55.45 52.5 52.45 5% ITM 11.8%
LEG 23.15 22.5 22.30 3% ITM 10.6%
PBI 18.35 18 17.70 2% ITM 20.0%
CLX 65.69 65 64.44 1% ITM 10.6%
T 29.30 29 28.84 1% ITM 24.7%

Now, some of those are above the 12% annualized yield goal, and some are below. The average of these six is just over 15%. It never hurts to have some cushion because there will be months when the underlying stock drops below your break even point. If you target an average return higher than 12% (like 15% or 18%) and then have a loser or two within your diversified portfolio, then hopefully the others will make up for the loss and you can maintain your 12%/year.

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