Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘call writer’

How to Generate a 10% Return in 45 Days

In our Monthly Income Report, we look for opportunities to utilize option selling to generate income. While we focus on selling cash-secured puts and covered calls on high quality stocks, we sometimes identify high return trades. We like to have 2 or more stock or company events leading to positive confirmation that the stock will continue its trend. This month we have identified a stock with a bullish technical indicator that has potential to generate a 10% return in only 45 days.

Stock: Alkermes plc (ALKS) is a biopharmaceutical company. The Company is engaged in the researching, developing and commercializing pharmaceutical products that are designed to address medical needs of patients in therapeutic areas. The Company has a portfolio of marketed drug products and a clinical pipeline of products that address central nervous system (CNS) disorders, such as schizophrenia, depression, addiction and multiple sclerosis (MS).

Alkermes just announced positive preliminary top line results from ENLIGHTEN-1, the first of two key phase 3 studies in the ENLIGHTEN clinical development program for ALKS 3831, an investigational, novel, once-daily, oral atypical antipsychotic drug candidate for the treatment of schizophrenia. ENLIGHTEN-1 was a multinational, double-blind, randomized, phase 3 study that evaluated the antipsychotic efficacy, safety and tolerability of ALKS 3831 compared to placebo over four weeks in 403 patients experiencing an acute exacerbation of schizophrenia. The study also included a comparator arm of olanzapine, an established atypical antipsychotic agent with proven efficacy.

ALKS will announce earnings on July 27 but should be positive on this news.

This stock has formed a pattern called Flag (Bullish), providing a target price for the short-term in the range of 61.50 to 62.30 (see chart below). We think the stock can hit the target price within 6 weeks or less. The price recently crossed above its moving average signaling a new uptrend has been established. While we like the upside potential in ALKS, we want to protect the downside against market changes.

Technical Setup on Alkermes ALKS

Strategy: We want to sell a covered call on Alkermes using the August 2017 60 Call. For each 100 shares of ALKS stock you buy, sell one August 60 covered call option for a $54.50 ($58.70 – $4.20) debit or better. That’s potentially a 10.0% assigned return with a 7% downside protection. If you want more downside protection, you can purchase an August 55 PUT for less than $2.00 per option.

This is a higher risk trade than we normally place in the Monthly Income Report. However, this is a nice setup with a positive news announcement, positive technical confirmation and increased premium from selling options for income.

Let more about creating monthly income here.

Kick Off Your Wealthy New Year

Today, we say goodbye to 2016 and open the door to a fresh start in 2017. This is the time of year we embark on hairy ass new goals in hope of transforming our lives. Hey, I am one of you too. I have goals to improve my health, lose some weight and more achieve community related goals. Of course, the one constant is to maintain focus on growing my investing income. My foundation for income is the PCD Income Strategy.

I use put selling to create my favorite income strategy – the Put-Call-Dividend (PCD) Income Strategy. This is simple selling puts each month on a select stock to collect monthly income. If the stock gets put to me, then I sell covered call options for more income while also collecting dividends paid by the stock. I sell call options for premium each month until the stock is called away from me. Then, I will start selling puts against the stock again. This strategy is exactly why I only sell puts on stocks I want to own – world class, strong dividend stocks.

I view the PCD Strategy as an opportunity to collect up to three separate income streams from a single stock selection. I prefer this strategy compared to the buy and hold of owning a stock that only pays dividends every quarter and may have a capital gain in the future. This prevents me from having to time the market and wait for a return. I want to create monthly income so the PCD Strategy presents the best opportunity to achieve this objective regardless of market direction.

Remember this: Someone’s sitting in the shade today because someone planted a tree a long time ago. This is your year to get started growing your income tree. Join our monthly income plan to jumpstart your 2017 goals.

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

 

 

 

 

 

 

 

Click to enlarge chart

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!

Covered Call of Month – October Expiration

For subscribers to the Get Rich Monthly Income Plan, the monthly covered call trades all provided positive income from the selling of call option.  One of the better trades was FedEx (FDR) as the setup is shown below.  The covered call trade used a strike price of 120 as the stock closed well above this price on 10/18.  The trade provided a one month gain of 3.9% for covered call traders.

 

Covered Call on FedEx (FDX)

STRATEGY: Look at the Oct 120 covered call. For each 100 shares of FDX stock you buy, sell one Oct 120 covered call option for a $114.53 (116.83 – 1.30) debit or better. That’s potentially a 3.87% assigned return.

TREND:   The technicals for FDX are bullish with a strong upward trend. The stock has support at $107 and is above resistance. The company reported earnings today, Wednesday, September 18. S&P rates this stock 4 STARS (out of five) – buy.

BLANKET PUT: As a protective option to the covered call, you can buy the Jan 2013 110 Put for $3.20 to limit your stock downside to $110.00 per share. This put is not required for the covered call trade but serves as additional protection for those seeking to limit downside. You should sell the put when you exit the covered call position.

 

RESEARCH NOTES:  S&P maintains buy opinion on shares of Federal Express (FDX). We keep our FY 14 and FY 15 EPS estimates at $7.04 and $8.66. We raise our 12-month target price by $10 to $127, 18X our FY 14 estimate and towards the middle of its 10-year historical range of 9X-34X reported EPS. Q1 EPS of $1.53, vs. $1.45, is $0.02 below our estimate but $0.03 better than the Capital IQ consensus. FDX reaffirms FY 14 guidance of EPS growth of 7%-13%. We expect FDX to benefit from an improving global economy and its ongoing restructuring plan, and anticipate continued investor rotation into logistics stocks on good economic news.

Covered Call Trade of the Month

Investors seeking income in this volatile market can still sell covered call trades for both income and downside protection.  In the past month, the S&P 500 produced a return of 0.73%.  However, subscribers to the Get Rich Monthly Income Plan made off with a 4.7% return by trading a covered call on United Rentals (URI).  Here is the trade posted in July:

Covered Call on United Rentals (URI)

STRATEGY: Look at the August 55 covered call. For each 100 shares of United Rentals (URI) stock you buy, sell one August 55 covered call option for a $52.53 (55.63 – 3.10) debit or better.

Actions: URI is currently trading at $55.01 so the 55 call we sold is ATM.  These shares and call options should be closed on Friday (08/16) for a 4.70% assigned return.

 

Learn more here:

http://getrichinvestments.com/monthly-income-newsletter/

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.

Monthly Income Plan Newsletter

Signup below to receive a free copy of the Monthly Income Plan newsletter for October 2011.  This report contains a market update, list of monthly dividend payers, covered call trades, protective puts and calendar spreads.  Subscribe to Monthly Income Plan.

 


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Covered Call Recommendation on Humana (HUM)

Covered Call Recommendation on Humana (HUM)

STRATEGY:

Look at the October 2011 80 covered call.  For each 100 shares of Humana (HUM) stock you buy, sell one October 2011 80 covered call option for a 75.89 (78.19 – 2.30) debit or better.  This is potentially a 5.42% assigned return. The ex-date is 9/26/2011 for a $0,25 dividend per share which will increase the return.

Blanket Put:  If you are looking for a blanket put for protection, look to buy the Jan 2012 77.50 Put for $7.00.  You will sell the Blanket Put when the covered call position is closed.
Potential Risk: The technicals for HUM are bullish with a possible trend reversal. The stock is under accumulation with support at 76.35. S&P rates this stock 4 STARS (out of five) – buy.

S&P research notes:

S&P reiterates Buy opinion on shares of Humana (HUM) . HUM agrees to acquire MD Care, a California-based Medicare Advantage HMO with 15,000 members. Terms were undisclosed. HUM expects the transaction to close by year end. We see it benefiting modestly from improved economies of scale, as HUM already has 400,000 Medicare members in California. Nonetheless, we think it will improve its competitive position in the state. MD Care had ’10 revenue of $155M, but HUM does not expect the transaction to materially affect ’11 earnings guidance. Our EPS model is unaffected by the transaction until it occurs, and we keep our $90 target price.

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