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In my initial article I suggested that someone who's interested in current income should think of his stock portfolio as a mortgage free apartment building and that the dividends and the premiums from the covered calls are the rent.

There are many ways to manage your building because of the different strike prices and expirations for the calls which are constantly changing, however, the income stream from the dividends from your renters are paid out every three months until the calls are exercised. The most important management decision is the selection of renters (underlying shares) who should be a diversified group of industry leaders that have a long history of paying dividends that will produce a reliable income stream.

The dividends from an equal diversification of the following renters will average a 3 percent return. Exxon Mobil (NYSE:XOM), AT&T (NYSE:T), Coca-Cola (NYSE:KO), Proctor and Gamble (NYSE:PG), McDonalds (NYSE:MCD), United Parcel Service (NYSE:UPS), Johnson and Johnson (NYSE:JNJ), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). I included (AAPL) because it is paying a dividend and might follow soon and in the meantime offers rich call premiums.

The selection of the strike prices and expirations of the calls are a different matter and require a different skill set which include making adjustments to replace renters who were exercised away and have to be replaced. At the end of an expiration period or even sometimes prior, the manager will have to decide to buy back a call or lose his renter which he will have to replace or pay him to return now that he's upgraded his apartment and it's worth more.

An example of an early buy back and replacement of a tenant would be for an apartment that had a January 75 Call on PepsiCo (NYSE:PEP). Now that is selling for $82.50 and the call is $8 which you can buy back the call and sell the PEP shares for just a 50 cents loss to replace with another renter who has a better income stream from their dividends and call between now and January 2014.

If is replaced with 10 shares of which is selling for $880 and covered with mini January 890 calls that are worth $59 you'll pick $5000 which is more than the dividends you lost if you held the shares until their January expiration. This is a strategy for an income oriented investor who is willing to risk selling his upside potential for current income and having said that, the best management program is to select strike prices that are just above the closing price of your shares at expiration so you can re-write the calls at a higher strike price.

Source: The Covered Call Management Of The Apartment Building