How To Generate Extra Income From Your Bank Shares

With markets becoming increasingly volatile, investors might be more interested in generating income rather than capital gains. 

Bank stocks have typical paid reasonable dividends and as sophisticated investors, we can generate an additional income from holding banks stocks by using options. The strategy is a known as a covered call which involves selling call options against a stock position.

Let’s firstly check which bank stocks have a Buy Rating. To do this go to the Stock Screener and use these Parameters:

Then, sort by Industry. Looking at the table below, JP Morgan (JPM) is the main name that stands out, so let’s use that in our Covered Call Screener.

JPM Covered Call Example

When running the Covered Call Screener for JPM, we find the following results:

Let’s evaluate the second JPM covered call example. 

Buying 100 shares of JPM would cost $14,282. The April 21, 150 strike call option was trading yesterday around $0.1.60, generating $160 in premium per contract for covered call sellers. 

Selling the call option generates an income of 1.13% in 45 days, equalling around 8.99% annualized. 

That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 150?

If JPM closes above 150 on the expiration date, the shares will be called away at 150, leaving the trader with a total profit of $878 (gain on the shares plus the $160 option premium received). That equates to a 6.2% return, which is 49.3% on an annualized basis.

That particular covered call allows for a bit of capital appreciation. What if an investor was more income focused? They would need to sell a call much closer to the stock price (look for a low value in the Moneyness column).

Instead of the March 150 call, let’s look at the April 145 call. Selling the 145 call option for $3.45 generates an income of 2.48% in 45 days, equalling around 19.64% annualized. 

If JPM closes above 145 on the expiration date, the shares will be called away at 145, leaving the trader with a total profit of $563 (gain on the shares plus the $345 option premium received).

That equates to a 4.0% return, which is 32.1% on an annualized basis.

Of course, the risk with the trade is that the JPM might drop, which could wipe out any gains made from selling the call.

Barchart Technical Opinion

The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Implied volatility is at 21.33% compared to a 12-month low of 19.72% and a 12-month high of 44.62%. Some traders may prefer implied volatility to be higher before starting a covered call trade.

Bank stocks are a common component of most investment portfolio and now you know how to generate an income from your JPM position now.

If you have any questions, feel free to reach out to me by email or on Twitter. 

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

• Stocks Close Only Slightly Higher as Bond Yields Rise
• Suncor Energy's 4.35% Yield and Buybacks Are Drawing Option Income Investors
• Tesla’s Price Cuts Spark Price War with Chinese Electric Vehicle Makers
• Stocks Rise on Strength in Apple and Lower Bond Yields