Thirsty For Income? Consider This Strategy: The Coca-Cola Company (KO)

How Much Can You Make?
Once you’ve selected your price, you “write” your call option. Here is an example of the type of up front yield you can get with a covered call.

(assumes $7 commission for the option and $7 to buy the shares)

In Coca-Cola and PepsiCo’s case, you get around 1% up front. If the stock doesn’t reach your option price, you keep your shares and can write another option next month. If the shares go above your option price, you have to sell your shares, and in Coca-Cola’s case you make a small gain, in Pepsi’s case you lose a small amount. Either way, this strategy would theoretically give you better income than collecting the company’s dividend for the year. Keep in mind these are monthly yields not annual, so Coca-Cola at 1.09% is the equivalent of 13.08%, if you could write a similar option each month for a year.

Greater Risk = More Pop
SodaStream is a more volatile stock than either Coca-Cola or PepsiCo. However, with greater risk comes greater reward. As you can see, SodaStream pays 3.47% in just one month. In theory, you could write this one option and make more in one month than collecting dividends from Coca-Cola or PepsiCo for the whole year. The worst thing that can happen is the stock goes down. In that situation, you keep your shares and your premium. The best thing that can happen is the shares go up, you keep your premium and a capital gain from the sale of the shares.

The bottom line is, income oriented investors have options beyond just collecting a dividend. If you are interested in covered calls, most brokers offer tutorials and information about how these options work. In addition, Fool.com offers a fairly comprehensive list of definitions and information about options here. Trading options isn’t for everyone, but if you are looking for better income and aren’t opposed to selling your shares if they go up, take a look at covered calls.

The article Thirsty For Income? Consider This Strategy originally appeared on Fool.com and is written by Chad Henage.

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