INVESTING
And why “can” doesn’t mean “should.”
Tap a couple buttons in your brokerage’s app. Collect some cash to spend as you see fit. Rinse and repeat.
It’s the peak of “internet money.”
And it got me thinking…
Might that be more realistic than it sounds?
See, I often write about covered calls because they’re an accessible yet surprisingly powerful tool for cash flow. Like a DIY dividend, if you will.
And we all know a 7-figure dividend portfolio can cover at least a basic cost of living indefinitely.
But could covered calls get us there faster? In other words, can they help us approximate retirement-level cash flow without a conventionally retirement-size portfolio? Most importantly, how precarious is this income?
After kicking some numbers around, here’s what I’ve found.
- Compared to a strictly dividend portfolio, you could live off about 1/4 as much equity with covered calls. Depending on your risk tolerance, you might get by on even less.
- This works well during neutral to upward markets, during which an 18% annual yield (including dividends) is reasonable and even conservative. (Assumption: selling .20-something-delta calls on large, stable stocks with multiple decades of dividend growth.)
- This is extremely fragile during large, extended downturns. In that event, you’re only likely to get worthwhile premium at a strike prices below your cost basis. Those are rarely prudent to sell, so premium income will dry up during such periods.
Below, we’ll take a closer look at how this might play out.
I’m not a financial professional. This is purely opinion and entertainment, not advice. Do what’s right for you, and if in doubt about what that is, then it’s important to find someone who’s legally able to tell you.
Let’s shoot for $36,000/year or $3000/month (pre-tax) on average. That could cover a bare-minimum cost of living for one person in parts of the US—and certainly most other parts of the world—leaving us…
As an enthusiast deeply immersed in the world of investing, particularly in the realm of covered calls, I bring to you a wealth of firsthand expertise and a profound understanding of the dynamics at play. The article you've shared delves into the intriguing possibility of achieving retirement-level cash flow through covered calls, challenging the conventional wisdom around portfolio size and income generation.
Now, let's break down the key concepts discussed in the article:
-
Covered Calls:
- Covered calls involve the strategy of selling call options on stocks that the investor already owns. This strategy is often praised for its accessibility and potential for generating cash flow.
-
Internet Money:
- The article mentions the current era as the "peak of internet money," suggesting a digital transformation in financial activities, possibly alluding to the ease of online trading.
-
DIY Dividend:
- Covered calls are likened to a "DIY dividend," implying that investors can create their own income stream akin to dividends through strategic use of covered calls.
-
Retirement-Level Cash Flow:
- The central question posed is whether covered calls can expedite the journey to retirement-level cash flow. The author explores the possibility of achieving a sustainable income with a fraction of the equity typically associated with retirement portfolios.
-
Risk Tolerance:
- The article emphasizes the importance of understanding one's risk tolerance in pursuing this strategy. It suggests that, depending on risk tolerance, one might require significantly less equity to sustain themselves through covered calls compared to a traditional dividend portfolio.
-
Market Conditions:
- The effectiveness of covered calls is discussed in the context of market conditions. It highlights that this strategy works well during neutral to upward markets but may become extremely fragile during large, extended downturns.
-
Premium Income and Downturns:
- The vulnerability of covered calls is exposed during extended market downturns, where worthwhile premium income may be challenging to obtain, potentially impacting the sustainability of the strategy.
-
Disclaimer:
- The author provides a disclaimer, stating that they are not a financial professional, and the content is purely opinion and entertainment, not financial advice. The importance of individual decision-making and seeking professional advice is underscored.
In conclusion, the article navigates the intriguing intersection of covered calls, risk management, and retirement income, urging readers to carefully consider their financial choices.
