It’s one of the most frustrating things an investor can experience: Thanks to some supposed global calamity in the making, the stock market enters a period of insane volatility. Each tiny bit of news is parsed by the financial media, and then the major indices swing wildly — sometimes even in direct conflict with the “goodness” or “badness” of the news itself. 

After a few months of this — and more than a few sleepless nights — you check your computer screen to find the stocks in your portfolio are right back where they were before.

#-ad_banner-#It’s times like this that can lead an investor to ask: 

“Is all of this worry even worth it?”

If you can identify with that feeling, then believe me when I tell you I understand. We’ve all been there.

But what if I told you that you didn’t have to settle for this? It just so happens that these times of great market volatility are prime-time for one of the safest, most reliable ways around to earn extra income. And what’s more, you don’t even necessarily have to be “right” about the stocks you pick…

I personally can’t think of a better strategy for investors of all stripes in this current market environment.

Just ask my colleague Amber Hestla, head of Profitable Trading’s Maximum Income service. Amber and her premium readers use an entry-level options strategy — known as covered calls — to safely earn hundreds of dollars — sometimes even thousands — in extra income with each and every trade in her newsletter.

A covered call strategy requires you to sell call options on a stock you just bought or already own. When you sell call options, you can generate instant income, also known as a premium, for every 100 shares you own.

Since you earn this income upfront, this offsets some of the downside risk in the stock — the money you earn effectively reduces your cost basis. And because you own the shares, you still get to participate in some of the upside.

An Example Of A Covered Call Trade
Let me give you an example of a covered call trade…

Let’s use Phillips 66 (NYSE: PSX) as an example. Shares were recently trading for about $88. Let’s say you bought 100 shares at that price. You could sell a call option on Phillips 66 that expires in May with a strike price of $95, which trades for about $1.20.

This means if you execute this trade, you’ll earn a premium of $120 ($1.20 x 100 shares). That’s a return of 1.4% ($120 premium/$8,800 cost of shares). That may not sound like much, but it’s money you wouldn’t have had otherwise. It’s also roughly half of PSX’s current annual dividend yield. What’s more, once this trade expires in May, you can repeat a similar trade again and again. (For the record, if we annualize this trade out, you’d earn income of 7.8% from your position in addition to dividends.)

Now, as long as the stock price stays below $95 on the date the options expire, you get to keep your shares. Conversely, if the share price rises to $95 or above, you’ll sell the shares for $95. Since your cost basis is $86.80 (the $88 per share paid minus the $1.20 premium you received), you see a net profit of at 9.4% in 64 days. That’s an annualized return of 54%.

How To Win With Covered Calls… Even When You’re Wrong
Now here’s where covered calls can really save your bacon. Let’s say you recently bought 100 shares of Phillips 66 thinking they would rise. But something happens that you didn’t anticipate (like an earnings miss) and the stock drops by 5% to $83.60.

If the stock stays at that level through May 20, then you’ll keep the $120 per contract and continue to own the stock. Since you own PSX at a cost basis of $86.80, what would have been a 5% loss is now only a 3.7% loss. Not bad.

That helps soften the blow a bit. And since you had enough faith in the company to buy shares in the first place, you should be able to sleep confidently at night knowing that either the stock price will rise or you can hold on and keep selling covered calls on the position to earn income (not to mention collect regular dividends), reduce your cost basis, and minimize losses until things turn around.

This isn’t just theory, either. As Amber points out, this is exactly what happened with one of her recent trades in Maximum Income…

Just look at our position in The Goodyear Tire & Rubber Company (NYSE: GT), one of the three calls that expired worthless on Feb. 19. Since we opened the position on June 26, shares are basically unchanged. Over that period, shares have fallen slightly from $31.33 in June to $30.12 today, a 3.9% decline.   But Maximum Income subscribers actually have a gain in Goodyear Tire. How is this possible? Even though our shares have declined in price, the money we’re generating from selling options counters the loss. Essentially, while other investors sit back and hope the gains will come to them, we’re using covered calls to actively create the gains we want to see. For every 100 shares we own, we’ve been able to collect $220 from selling four covered calls, as well as an additional $20 in dividends — more than enough to cover the $121 drop in our shares’ value. If we’d simply been holding shares of GT this whole time, we’d only have received the $20… and we’d be down $101 on our position.

As Amber went on to mention, that’s not to say covered calls are risk-free, of course. No investment is. But they can help you reduce risk, which is every bit as important as income and capital gains, if you ask me.

In this market, where safe income is tough to find, selling covered calls on high-quality stocks could be among the best — and easiest — strategies available. In fact, Amber has released a short video detailing how you could “skim” up to $850 a week in extra income from Wall Street by using her strategy. To watch her video, click here.