Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘call writing’

How To Manage A Covered Call Portfolio

The option income portfolio approach to selling covered call options seek to do the following:

  • To create options portfolios with the objective of earning consistent returns on investment throughout the stock market cycle;
  • To maximize options premium income, dividend income, capital gains potential and downside protection;
  • To increase long-term capital appreciation and income from stock ownership;
  • To minimize risk and provide diversification.

The option income portfolio is a continuous investment strategy.  Stock should be owned and options sold.  Dividend and option premiums can be earned and capital gains increased.  This is a key step in successful investing.

The more active you are, the greater you potential returns will be.  For example, when a sold call’s market value drops to 10-20% of the call premium received when initially sold – the investor should buy to close the call and then write a new call for more time value and/or at a different strike price.  This makes the covered call strategy more continuous and more profitable.

The experienced covered call investor will not panic when the stock price exceeds their call strike price.  They will buy to close the sold call for a loss and sell a new call at a higher strike price.  The loss will be covered by the additional call premium and the potential capital gain of the increased stock price.  The loss from the initial call buyback is a taxable loss for your income tax statement.  The loss is calculated by subtracting the cost of the buyback from the initial call premium received.  The investor should always keep a running log of these buyback transactions that result in a trading loss for income tax purposes.
Like any losses over the allowable $3,000 in annual investing losses, they can be carried forward.

As an individual investor, you may not have time to manage a covered call portfolio like described above.  This is OK as you can still create a covered call portfolio for monthly income.  As you gain more investing experience, you can move in the direction of being more active in managing your covered call investing.

 

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.

Covered Call Trade on Expeditors International of Washington, Inc. (EXPD)

Covered call trade on Expeditors International of Washington, Inc. (EXPD).
Expeditors International of Washington, Inc. (EXPD) , today announced that its Board of Directors has declared a semi-annual cash dividend of $.25 per share, payable on December 15, 2011 to shareholders of record as of December 1, 2011.
STRATEGY:  Look at the December 2011 42.5 covered call.  For each 100 shares of Expeditors International of Washington Inc (EXPD) stock you buy, sell one December 2011 42.5 call option for a 40.85 (43.65 – 2.80) debit or better. That’s potentially a 4.68% assigned return including the dividend.
TECHNICAL:  The technicals for EXPD are bullish with a weak upward trend.  The stock is under accumulation with support at 45.19.  S&P rates this stock 4 STARS (out of five) – buy.
RISK:   For those seeking downside protection with a blanket put, buy the May 2012 42.5 Put for 4.10.  Sell the put when you exit the covered call trade.
S&P RESEARCH:  S&P reiterates buy opinion on shares of Expeditors International (EXPD) . Q3 EPS is $0.50, vs. $0.44, $0.01 ahead of our estimate and Capital IQ consensus.  However,$0.03 of EPS came from higher non operating income.  Gross revenues were disappointing, but net revenue growth improved on better airfreight margins.  We think EXPD did a good job in a difficult operating environment, and believe it remains well positioned for an eventual improvement in shipping demand.  We cut our ’11 and ’12 EPS forecasts to $1.80 and $1.98from $1.89 and $2.28.  We cut our target price to $60 from $65, 30X our ’12 estimate, in the middle of EXPD’s historical range.

Want To Create A Second Income?

Louisville, KY, October 28 2011 – Get Rich Investments, an online leader in helping individuals to create income producing investments, has a newsletter to guide investors seeking a second income.  This is one of the most valuable tools for investors to learn how to create monthly income from stocks and option strategies.

Does the idea of using an income investing strategy to create a second income every month on your funds appeal to you?  Get Rich Investments has created the Get Rich Monthly Income Plan to teach individuals how to create multiple streams of investing income.  This is a low-cost newsletter providing the following services:

    1. A list of CEFs (closed-end funds) that pay monthly dividends month after month. These investments can pay more than 10% annually and can sometimes be purchased at a discount to net asset value.
    2. A list of covered call trades consisting of high quality stocks such as the S&P 5-star research rating of the best stocks that are recommended as strong buys. These lists are updated each week with select trades added daily.
    3. Low risk investments to minimize market risk and to prevent your portfolio from taking a big lost in such uncertain market environments like we are experiencing today.
    4. We have created a strategy called the Blanket Put that will protect your investment from market downturns. The Blanket Put is your safety blanket to protect your portfolio from market downturns. This is worth the membership fee by itself.
    5. Access to multiple education resources to better learn how to be a more successful investor. Trades don’t end when you make a stock buy, sell a call, or complete the trade. Here we want members to be educated about how to manage a trade and when to take action.

The Get Rich Monthly Income Plan diversifies risk by seeking multiple streams of income. You can create monthly income by: covered call trades, covered LEAPS, calendar spread trades, monthly dividend CEFs and dividends from owning high quality, conservative stocks. That is 5 streams of income from this simple list as we focus on “cash flow” to the investor to improve your quality of life.

We have more than 20 years experience in the markets including trading covered calls and monthly income investments.  In addition, we have Masters in Business Administration (MBA) from a top business school and other experience in corporate finance and strategy.  We have authored several books including the original Get Rich – Stay Rich: Investing for Monthly Income that is currently on sale at Amazon and other bookstores around the world. It is important to you that your monthly income is in qualified, experienced investor hands who can be trusted to deliver the best trades.

Learn more about investing for income.

The Best Method for Call Writing

Most experts in the stock market will generally say, “the writer of an options is foregoing any increase in stock price that exceed the strike price for the premium received when selling calls.  The option writer continues to bear the risk of a sharp decline in the price of the stock. The cash premium will only offset this loss.”  Do you buy into this way of thinking?  This is not correct based on how I trade covered calls.

With my method, you no longer care about the price of the stock that you purchased.  When the stock does go down, we would buy back the option at an inexpensive cost and immediately write a new option.  For example, we received a premium of $3.00 and close it at $0.25 when the stock price drops.  If the stock price went down $5.00, we would write a new call at at a $5 lower strike price.  This may net an addition premium of $3.00 so when you add the premiums minus the buy back of the first option we have $5.75 while the stock only dropped $5.00.  The second premium helped to offset the loss from the strike price.

When the stock does not reach the strike price, let the option expire, keep the premium, and write a new cal at the same strike price.  When the stock price goes above the call strike price, buy back the call option and write a new option at a higher strike price to reflect the gain in the stock. the second premium will help defray the cost of the buyback while you have a gain in the stock price.

For the buyer, options are a wasting asset as time decay erodes value.  The time value portion of a option is always zero at expiration.  Selling the time value repeatedly on the same stock makes option income work for you.

With my trading method, you will not be waiting on the stock price to go up to make money.  You will make money on the wasting time value of options you have sold.  this will change your investing philosophy about the stock market.

Covered Call Trade on AT&T (Video)

Brian Stutland lays out a covered call trade for income on AT&T (T)

Covered Call Trade on AT&T

 

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Get Money for Nothing and Your Stocks for Free

Covered calls generate income through call premium received and lowers the risk in the underlying stock position.  Obviously, the risk of owning a stock is the price you paid to purchase the stock.  Anytime the stock drops below the price paid to purchase the investor is now in a losing position.  If you purchase a stock that pays dividends, then dividends collected lowers the purchase price of a stock.  For example, you purchase FirstDividend stock (fictional name) for $30 that has a 3.0% dividend yield.  The dividend will be $0.90 per year or $0.23 per quarter. After the end of year one, your adjusted share price in FirstDividend will be $29.10 ($30-$0.90).  At a yield of 3.0%, your investment will double in 24 years just on the dividend without an increase in share price.

Now, let’s add a covered write to the stock each month.  For example, you can sell a $31 call at $0.75 that expires in 30 days.  Assuming that we don’t get called out, this will total to $9.00 at the end of year one if we continue to sell a call each month for the $0.75 premium.  This will drop the adjusted share price from $30 to $21 or 30% less than the price paid excluding your dividends.  This will double your investment in First Dividend in 2.4 years based on the call premium received each month.

If you combine the call premium with the dividend, then the adjusted stock price will be $20.10 at the end of year one.  This will further lower your time to double to 2.18 years.  This means that at the end of 2.18 years, you will have your total investments returned to you excluding any share price change or dividend increases and still own the stock.  This is a great benefit of selling calls against the stocks you hold in your portfolio.  In the first year alone, you will have received $990 in income for each 100 shares of stock you own.

The trade-off in writing calls against stock you own is that the topside is capped at the strike price of the call sold.  Therefore, you are at risk of selling your stock at the strike price which limits potential upside share price appreciation.  This should not be a problem for the investor that is seeking monthly income.  You must commit to writing calls for monthly as your chosen strategy to make monthly income and not be concerned that the share price will increase in a month.  Of course, if the stock gets called away then you can sell puts to get back into the position.  The put premium will serve to lower your adjusted share price just like the call premium in the example above.

You can continue the income cycle by selling puts to buy stock then sell calls when you own the stock.  Each month you are lowering your adjusted purchase price until you get your investment back and have a $0 cost in the stock.  All the while you are creating monthly income from your investment.  The end result is that you get your money for nothing and your stocks for free.

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