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How to Earn Extra Income Without Risking Your Long-Term Stocks

Updated: May 23


Hi Good Kids!


This week I'm talking about a strategy I use when I want to earn income on my long-term stock positions without the risk of being called away. If you aren't already doing this, you should! Quick disclaimer before we get started, only do this on positions where you have 100 shares.



The Challenge


If you're like me, you want to hold onto your long-term shares but still generate some extra income. Theta decay is a key component of my income.


Selling covered calls at resistance levels is a popular strategy I still use, but it has an obvious downside. If the stock keeps rising, you might end up having to buy back your calls at a higher price, or you have to let your long term shares go. There is nothing wrong with getting called away, but you do need to think about the tax implications and your overall investing timeline and strategy.


The Solution: Bear Call Spreads


A bear call spread involves selling a call option at a strike price above the current stock price and buying another call option at a higher strike price.


You still collect a premium from selling the call option giving you income generation.

The long call option you buy limits your risk if the stock price surges you have protection


How It Works


1. Sell a Call: Choose a strike price above the current market price where you think the stock might face resistance.

2. Buy a Higher Strike Call: This call option protects you from unlimited losses if the stock price continues to rise.


By using a bear call spread, you ensure that your long-term shares aren’t called away, giving you peace of mind.


Benefits

  1. Reduced Risk: The bought call acts as a safety net, limiting potential losses.

  2. Cash Flow: While the premiums from bear call spreads are smaller than those from covered calls, they still provide a steady income stream.

  3. Flexibility: If the stock pulls back, you can close the spread early and potentially profit.


Cons

  1. Reduced Cash flow: The long put is a debit, as mentioned this is a down side over a covered call.

  2. Assignment risk: the assignment risk is not totally gone, manage these before theta decay gets to the long call. If your short call is ITM and the long call is not, you can end up losing on this trade or losing your shares.



Example

Suppose you own lots of shares of Google (I know a guy who does...)


GOOGL is currently trading at 175.


I could sell a covered call at 185 and collect $126. Let's ignore it's a down day, you all know I don't like to sell calls on down days.. Just go with me here.


This is the options chain showing the call we are selling. The 185 call, for 1.26

This is the risk graph. Notice after Google passes 186.22 our upside is capped so the 'max loss' here is infinite? We aren't losing money from our account, we are losing out on the appreciation of the shares because remember we'd be called away at 185 if google closes over 186.26 we don't get any more profits


This is what it looks like on the chart

Let's look at a bear call spread, this is the options chain. we are buying the 190 for debit and we sold the 185 for a bigger credit. So our total credit is $71

This is the risk curve. Do you notice our max loss went from infinite to $429! Less credit, less risk... We see this all the time.


This is what it looks like on the chart. We are obligated to sell our google at 185, but we have the option to buy them back at 190


If google starts moving up to 185 obviously our short call will start losing, but the long call will appreciate in value to offset the loss. If google closes below both of these options we keep the credit we received. I generally manage these by taking them off together. If you are more advanced you can unravel them, but understand the risks if you turn a defined risk trade into an undefined risk trade!




By implementing this strategy, you maintain control of your long-term shares and continue to generate income, even in a rising market. Selling bear call spreads is a nice way to keep your shares safe while still earning extra cash. It’s not as lucrative as covered calls, but it’s a smart trade-off for the security and steady income it provides for your longer term holdings



Subscribe to the GKT Weekly Newsletter, or if you are really serious I'll see you in discord much sooner!


Happy Trading Good Kids!






I provide all of this to you for free. If you enjoy this, perhaps you'd consider buying me a coffee. If you have feedback please let me know. I'm here for you!



None of this is trading advice, it's for your education. I'm just some dude on the internet who’s been trading 2 decades, and I use the stock market as my primary source of income. None of this is financial advice. Any trades or decisions you choose to make are at your own risk, this is purely educational!



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