Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘call strategy’

How to make $3K in Extra Monthly Income

The year 2016 was another stellar year of total returns and monthly income. Our perpetual covered call strategy was a big winner.  In this strategy, we create a covered call position to sell monthly call options for income and buy a long dated put option to protect our downside risk.  The put cost is spread across several months so the cost is low per month and will only slightly diminish our monthly income.

As we close out 2016 and reset for 2017, we are reviewing the results we obtained from the perpetual covered call strategy during the past year. In terms of total return as tracked in the monthly spreadsheets, the average across all positions was 27.8% during 2016. In the past year ending 12/17, the S&P 500 only returned 12.75% and the DJIA returned 16.8%. Therefore, we more than doubled the S&P and beat the Dow Jones significantly while generated significantly more income. The average monthly income across our open positions was $152 for each position with 100 stock shares! AND this includes the cost of having a long put to protect against downside risk on each position.

The average cost of 100 shares across all positions was $5,278 which generated an average of $152 of income each month. A $50K portfolio will generate an average of $1500 per month while a $100K portfolio creates $3,000 every month! This is proof our income strategy works. We target a 2-3% return per month on average.

We had no losing positions in our perpetual call portfolio in 2016. We had 3 positions with returns greater than 40%and all but one with returns greater than 12.7% of the S&P 500 in 2015.

The table below shows the results for each perpetual covered call position during 2016. This table is the same information as displayed in the monthly tables for each position (based on owning 100 shares of stock and selling one covered call each month). This is for portfolio tracking only as subscribers will own more than 100 shares and sell like size amount of call options for income each month.

2016-covered-call-results

 

Your ads will be inserted here by

Easy Plugin for AdSense.

Please go to the plugin admin page to
Paste your ad code OR
Suppress this ad slot.

 

 

 

 

 

 

Click to enlarge chart

Winning in the Year of the Improbable

The word “improbable” is defined as not likely to be true or to happen. Have you noticed how many events have happened in 2016 that were improbable? The Cleveland Cavaliers were trailing 3 – 1 in the NBA Finals but rallied to win the first world championship for the city of Cleveland. Last night, the lovable losers, Chicago Cubs, completed a 3-1 rally to win the World Series. It ended a 108 year drought in Chicago for the Cubs. Now, this is an improbable event. There have been others such as the surprise Brexit vote that tanked markets a few months ago. What’s next? Does Trump win the presidency?

The stock markets have pulled back in the last week due to uncertainty around the election coupled with projected FED interest rate increases. Today, a talking head on CNBC was calling for investors to sell everything as the market is ready to crash! I have seen these types before and they don’t scare me. I plan to stick to doing what my investors do best – sell options for income.

Yes, markets will pullback when they lack clear direction. But I have some downside protection by selling options and continue to reap income along the way. If I just sit in a long stock position, its value will fluctuate with the market. I prefer to create income each month regardless of the market direction. I sell call options on the stock I own for both income and protection. When the market rebounds, I will sell put options for additional income too.

With this strategy, there is no improbable event. You get paid when you sell the options and can continue to compound your income.

You don’t need to worry about the next improbable event – join the Millionaire’s Club today.

How to Develop Multiple Streams of Income

To achieve financial independence, you must create a level of income to cover the lifestyle you desire. There are many ways to accomplish an income to fund your life experiences. Many work during their life to save money for this purpose. Some are entrepreneurs that start businesses usually with hired managers to carry the workload to create their income. Others invest in passive investments such as rental housing. Here is a look at investing strategies to increase your earnings and create multiple streams of income.

In author Thomas C. Corley’s five-year study of self-made millionaires he found that many of them develop multiple streams of income: 65% had three streams, 45% had four streams, and 29% had five or more streams.

“Three streams of income seems to be the magic number for the self-made millionaires in my Rich Habits study, but the more income streams you can create in life, the more secure will your financial house be,” he writes.

I apply Corley’s thinking to my investment portfolio by identifying several streams of income. One passive income stream is collecting growing dividends from world class stocks. These stocks have a strong financial position, competitive market position, known brand and growing dividend history. I also invest in closed-end funds that pay monthly dividends. This create a diversification opportunity as I can add fixed income, preferred stocks and other types of investments. Lastly and probably more important, I sell options for monthly premium income. This includes selling cash-secured puts and covered calls. I love this strategy and have created a consistent, growing stream of income.

Join me in creating multiple streams of incomes to live the life you desire.

How to Get 50% of Your Stock Purchase in Monthly Income Installments

A covered call trade is a very simple instrument to increase your monthly income. The basic idea is to sell a call option for every 100 shares of stock you own.  By selling the call option, the investor receives a premium which is what our investors call monthly income or monthly dividend payments.  We sell new call options each month to create new income – month after month.  This is in addition to the current dividend paid by stocks on a quarterly basis.

Here is an example of what subscribers to the Get Rich Monthly Income Plan achieved in 2013:

Subscribers purchased Holly Frontier in January 2013 for $46.35 per share. So purchasing 100 share of stock will cost a total of $4,635 plus commission costs.  At this time, HFC was paying a $0.30 per quarter dividend for a dividend yield of 2.59%.  This is a nice yield on a fairly stable stock but it gets even better.  In addition to the $1.20 in quarterly dividends, HFC paid $2.00 more per share in special dividends.  This increases the total dividends to $3.20 per share in 2013.  The addition of special dividends increases the stocks annual dividend yield to 6.9%.  Wow, a 6.9% dividend yield is great in this low yielding stock market!

But it gets even better for Get Rich Monthly Income Plan subscribers.  They sold a call option on each 100 shares of HFC stock they owned each month of 2013.  Based on our results, this created a total of $1,985 for the entire year.  This created an average monthly income of $165.42 by selling the call option which created the covered call trade.  The total premium income of $1,985 is about 40% of the total cost of entering the trade – $4635 at the beginning of the year.  Therefore, investors received nearly half of their initial investment in HFC back during the year through a simple monthly covered call trade.

Now, subscribers can add the three sources of income – quarterly dividend, special dividends and covered call income together to create a Monthly Income Plan.  In total, subscribers received $2,305 in additional income from owning 100 shares of HFC stock in 2013.  This is an average of $192 in additional income each month of 2013. And, the $2305 in income is 50% of the total amount of the initial investment in 100 share of HFC!

How to Make Monthly Income in a Sideway Moving Market

Expectations for the third quarter earnings were dismal, with forecasts for a decline in profits from a year ago.  But a recent flurry of high-profile reports has investors scowling at the weak revenue numbers, adding to worries about the state of the U.S. economy and the outlook for corporate America.

IBM, General Electric and Microsoft fell short of revenue expectations, creating a sour mood early in the third-quarter reporting period.  This has led to a market that is moving nowhere too soon.  For the last month (Sept 24 – Oct 19), the benchmark S&P 500 Index is only up 0.4% while the PowerShares S&P 500 BuyWrite Portfolio (PBP) is down 0.95%.

Where can income investors go for monthly income in a sideway moving market?

One option is to look at a covered call strategy for monthly income.  A covered call strategy provides income from the premium received when a call option is sold against 100 shares of a stock.  In general, a covered call makes money when the stock price goes nowhere (like today’s market), when the stock price increases and provides downside protection when a stock slightly declines in price.

Subscribers to the Monthly Income Plan had exceptional returns from the monthly covered call trades.  We enter 4 monthly covered call trades on September 24 2012 for trades to expire on October 19 2012.  This is a total of 26 calendar days for these covered call trades.

The results included:

a 6.75% monthly return on the United Rentals, Inc. NYSE: URI covered call;

6.57% on the USG Corporation NYSE: USG covered call;

5.09% on the Royal Caribbean Cruises NYSE:RCL covered call;

and a 5.4% return on the SanDisk Corporation NASDAQ: SNDK covered call.

This is an average return of 5.95% in one month on these 4 covered call trades.  For comparison purposes, this is an annualized return of 83.6%.

These trades significantly beat the S&P 500 and PBP Buy-Write for the last month.  For income investors, they made $595 for every $10,000 invested in these 4 combined covered call trades.

Click here to subscribe to the Monthly Income Plan to get new covered call trades each month for only $19.95 per month.

 

Proof that Option Income Writing is a Winner

With a covered call and protective put strategy, you have a win – win- win –win situation.  Here is what happens when the underlying stock changes:

  • Stock price increases –      you win by keeping the premium and either rolling up your call to a higher strike price or letting the stock get assigned;
  • Stock price is unchanged – you win by keeping the premium and possibly the stock to write more calls against it in coming expiration months;
  • Stock price slightly declines – Your amount of premium received will cover a slight decrease in the stock price so you win and keep the stock for more call writes for income;
  • Stock price declines aggressively – the protective put will gain value as stock prices decline closer or through the put strike price while you keep the premium and stock for more writes.

If you use the covered call with a protective put, you can create a great wining trade.  This is better for writing calls against a stock several months as this will offset the cost of buying a put for protection.  The protective put should be at least six months ahead of the current call expiration month when initially purchased.   This allows the investor to spread the put cost over the six month period to increase the profitability of the trade.  For example, if the protective put cost $300 to buy, the cost will average $50 per month on average.  However, if you exit the covered call position before the put expires, you can sell the put to recoup some of its cost.

In the case of a significant price decline, the put will become more profitable as it will increase in value.  The call writer can buy back the sold call
for pennies and sell a new call at a lower strike price to get more premium income.  After a few months of this, the trade should be profitable.

Chevron Is Right For This Option Strategy

Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream.  CVX has an equity score of 9.6 (VERY BULLISH) out of a 10.  This is a covered call position on Chevron Corp (CVX),

OPTION STRATEGY:

Look at the June 95 covered call. For each 100 shares of Chevron Corporation (CVX) stock you buy, sell one June 95 covered call option for an 96.70 (100.30 – 3.60) debit or better. That’s potentially a 3.4% assigned return.

STOCK TREND:

The technicals for CVX are bullish with a weak downward trend.  The stock is under distribution with support at 101.95.  S&P rates this stock 5 STARS (out of five) – strong buy.

RESEARCH NOTES:

S&P maintains strong buy recommendation on shares of Chevron Corp. (CVX) . CVX sees ’12 capex at $32.7B, up from $28B, before acquisition, expected in ’11.  Upstream is slated at $28B (87%), with major capex at LNG and deepwater projects.  We think it will comfortably fund this plan, and possibly boost dividends and buybacks via projected cash flow.  We see CVX thriving from a smaller refining footprint, where Asian exposure will help future results.  About 69% of production is higher-margin oil.  Shares have outperformed peers and benchmarks in ’11, but discounted valuations and solid near/long-term growth visibility remain highly attractive, in our view.

The Biggest Mistake New Call Writers Make

Covered call trading is not like directional trading which has an objective to time the movement of a stock in the direction it is moving.  Covered writing is a game of regular, incremental returns.  The covered call writer’s objective is to collect the option premium for income without taking any damage to the downside of owning the stock.  The secret to success for the call writer is to make smaller, more consistent returns compared to a advanced option trader who makes many bets waiting for a 50% – 100% winner.  The biggest mistake by new call writers is writing a stock solely to capture the fattest time value premiums.

To improve the chances of being successful, the call writer should focus on stock selection.  The covered call trader should focus on 3% monthly returns.  However, a 15% drawdown on a trade will require 5 months of 3% returns to recoup the loss and get back to even.  This is why the Monthly Income Plan focuses on 5 star stocks signaling high quality stocks.

Why avoid the fattest premiums for a measly 3% monthly return?  The short answer is that high premiums often signal high risk, and writing calls on these options without regard to stock quality will eventually decimate your trading account.  There are two reasons that value premium becomes high enough to offer big returns:

1)   The stock is volatile and implied volatility is in line with the stock, or

2)   Implied volatility (IV) is significantly higher than actual volatility.

Simply, the higher the rate of return, the higher either actual or implied volatility (or both) must be on the options.  If two stocks had volatility of 60% we would expect the option premiums to be roughly comparable.  What if one stock had an IV of 25%?  This indicates a market expectation of less volatility in the future but it also means the investor is not getting paid for the 60% volatility risk he is taking on.  If the other stock had IV of 80% then the investor must determine what is causing the IV to be higher than the 60% actual volatility.  This usually indicates that the market is expecting some new event on the stocks such as news, announcement, earning or more.

If the IV is in line with the stock volatility, then the options are priced fairly so the decision comes down to – do you want to invest in the stock.  The rule is to AVOID stocks with spiking IV and look for a different trade.  To be conservative, look to write calls on stocks with a volatility of 40% or less.  If you are experienced and seek more income, look for stocks with volatility between 40% and 60%.  Anything above 60% I would consider high risk so proceed with caution.  You should at least look at the volatility of the stock before you invest to know what the risk of the trade may be over the coming option period.

Covered Call Trade on Deere and Company (DE)

This is a covered write on Deere and Company (DE) for the December 2012 expiration.  Deere & Company provides products and services primarily for agriculture and forestry worldwide. The company operates in three segments: Agriculture and Turf, Construction and Forestry, and Credit.

OPTION STRATEGY:

Look at the December 72.5 covered call. For each 100 shares of Deere and Co (DE) stock you buy, sell one December 72.5 covered call option for a 70.14 (73.64 – 3.50) debit or better. That’s potentially a 3.36% assigned return in 19 days.   That is a 63.66% anualized gain (comparable purposes only) on this short trade.

TRADE TECHICALS:

The technicals for DE are bullish with a weak upward trend.  The stock is under accumulation with support at 74.06. S&P rates this stock 4 STARS (out of five) – buy.

RESEARCH NOTES:

S&P maintains buy opinion on shares of Deere (DE) .  Oct-Q EPS of$1.62, vs. $1.07, beats our est. by $0.23.  Revenue gain of 20% was in line with our est., on strong equipment demand, but costs were controlled better than we expected.  Most encouraging, in our view, is DE’s equipment outlook, with its guidance of 15% growth in FY 12 (Oct.) equipment sales, well in excess of our prior 10% est.  Our long-term view also stays positive, on growing needs for food and infrastructure.  We raise our FY 12 EPS estimate by$1.00 to $8.60, and initiate FY 13’s at $9.60.  We keep our target price at $99, in line with historical relative metrics.

Covered Call Write on Advanced Auto Parts

Covered Call trade on Advanced Auto Parts (AAP).

OPTIONS STRATEGY:

Look at the December 2011 70 covered call.  For each 100 shares of Advance Auto Parts (AAP) stock you buy, sell one December 2011 70 covered call option for a 67.06 (69.31 – 2.25) debit or better. That’s potentially a 4.38% assigned return.  This stock also pays a dividend which may add another 0.1% to the return. The stocks last ex-dividend date was 9/21/2011.

TECHNICALs:

The technicals for AAP are bullish with a possible trend reversal.   The stock is under distribution with support at 64.38. S&P rates this stock 5 STARS (out of five) – strong buy.

RISK:

For those wanting downside protection, buy the March 2012 65 put for 3.50.  Sell the put when you exit the covered call.  This is optional for the covered call to protect the downside of AAP at 65.

RESEARCH NOTES:
S&P reiterates strong buy recommendation on shares of Advance Auto Parts (AAP) .   For the 12-weeks ended October 8, EPS of $1.41, vs. $1.03, is $0.22 above our estimate.   While comp-store sales rose just 2.2%, this quarter lapped an exceptional 9.9% increase in the year-ago period, providing a challenging hurdle.   We continue to favor industry fundamentals, and expect global sourcing efforts and supply chain investments to drive improved gross margins over the medium term.  As a result, we are increasing our ’11 and ’12 EPS estimates to $4.96 and $5.71 from $4.72 and $5.47, and are also raising our DCF-based target price by $5 to $85.
EARNINGS HIGHLIGHTS:
  • On 11/09/11, the company announced quarterly earnings of 1.41 per share, a positive surprise of 19.4% above the consensus 1.18.  Over the past 4 quarters, the company has reported 3 positive (>2%), 1 negative(<-2%), and 0 in-line (within 2%) surprises.  The average surprise for this time period has been 5.0%.
  • AAP’s current quarter consensus estimate has remained relatively unchanged over the past 90 days at 0.68.  Estimates within its Subsector have moved an average of 0.0% during the same time period.
  • During the past four weeks, analysts covering AAP have made 1 upward and 0 downward EPS estimate revisions for the current quarter.
Share Some Winning Cash
Archives