Our first official covered calls – $134 in “passive” income

Hey all, welcome back to Findependence Canada!

Today I’m just going to be doing a follow up from a recent post you can view here.

In that post I discussed how I’d be trying out a new form of investing which is called “covered calls” and today I’m just going to come back around on that topic to provide transparency and feedback on exactly what I did and how it’s gone.

Covered Calls

Just as a quick reminder to new readers a covered call in short is you owning 100 shares of a company, going in to trade in your account and using the “sell to open covered call” option.

What this does is sells a contract to the buyer to then buy your 100 shares for a predetermined price at a predetermined date in exchange for a premium.

If the price isn’t reached you simply keep the 100 shares.

If the price IS reached you sell the 100 shares at that agreed upon price.

Make sense? so let’s look at what I did:

My Transactions

Now keep in mind I just wanted to get my feet wet and test this out a couple of times so I simply picked 3 companies that I wanted to hold long term in my dividend investing portfolio but that were also pretty affordable to buy 100 shares of.

I ended up buying Suncor (SU.TO), Canadian Utilities (CU.TO) and Shaw (SJR-B.TO) 100 shares each.

Here’s a little table I made up to track my progress:

An important reminder is to include all fees in your calculations, so for a Canadian with very few good account options like the States have I have to pay $9.99 to buy the 100 shares (tacked on to the “cost”) and also $11.24 for an options contract/transaction (which I’ve reduced from the “premium” column).

This $20+ loss in fees will eat into my profits but at least the one side of it – the $9.99 purchase of the 100 shares is a one time thing if my shares don’t actually get sold off.

Profit without selling shares

The profits tallied up to $134.28 in premiums received on $7,050 invested – or 1.90% returns. These shares will also pay out 5+% dividends for holding them per year so provided I can pull off similar calls even 3 times per year per stock I can bring in roughly 11% returns while keeping my shares if everything goes smoothly.

Now let’s say all 3 stocks hit their strike prices:

Profit with selling shares

The only change to this table from the last is the actual sale profits are realized as the shares are sold at the price agreed upon or the “strike”.

In this case our total profit is $384.31 on a $7050 investment or 5.45% returns.

Another addition is any dividends received in that timeframe so this could be bumped up even further but we’ll ignore those gains for now.

So that’s over a 5% gain for holding these shares from the start of November through until Dec. 18, 2020 and Jan. 15, 2021 for Shaw. Really not bad gains to be locking in.

Again – the down side is you collect your premiums and dividends and the share prices keep dropping which is again why I emphasize these have to be companies that you like holding long term.

Perfect World

In a perfect world, one where you can keep re-writing calls every two months, collect 5+% dividends in the meantime and your shares don’t tank but also don’t hit their strikes you could ideally collect upwards of 15% yearly on these shares which is a sunny side view but somewhat realistic.

Anyways, that’s all I have on this topic for today. Just thought I’d provide an update on which moves I actually ended up making to pursue this topic and gain some experience in the world of covered calls.

Remember that this is just tracking my journey for my and your entertainment so please don’t use this as financial advice and consult a professional prior to making any investments in your own accounts.

Thanks for following along, if you have questions or comments leave them below or over on Instagram @FindependenceCanada and we’ll be sure to get back to you.

FIC.