Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘covered call trades’

Are You a Penta Millionaire Yet?

In a recent article published in Barron’s, “Penta Millionaires: the New Rising Class” it discusses families with net worth over $5 million as a fast growing class in America. While this is correct about the changing of wealth, it still separates the wealthy from the other classes. While we all strive to attain our definition of success, the media continues to focus on the upper class. Let me share a secret with you, you can still have a productive and fun-loving life without being in the top income bracket. This is why we write a monthly income newsletter – to help those wanting to better their life and create a sustainable monthly income.

Here are some excerpts from the Barron’s article:

It is fair to say that at no time in history have so many Americans become so rich—or amassed their wealth so quickly. When John D. Rockefeller took title as the country’s first billionaire, in 1916, it was as rare an event as sighting a white whale, and seven decades later, the number of billionaires had still only reached 44. Since then, however, the ranks of the megarich have surged ahead with a caffeinated velocity.

At every level of the wealth pyramid, according to Penta’s research partner Boston Consulting Group, the ranks of millionaire and multimillionaire households have expanded. Last year, for example, there were 492 U.S. billionaires, meaning that 100 new billionaires were created in the past five years alone. But the most interesting trend is a little further down the pyramid: The number of households with more than $5 million in investible assets just crossed the one million mark, up 5% from 2014.

Flash forward to recent times. The rank-and-file rich have grown by just 5% a year recently, but this steady if modest climb over seven years has actually delivered better results. We now have a million-strong army of very rich emerging from the ho-hum, low-inflation economic growth that has been coupled with robust capital markets. Many have, in this calm environment, quietly sold off their private business or cashed in their stock-option windfalls.

At Get Rich Investments, we focus on creating stream of income to improve life and become financially independent. Once you learn how to create monthly income, you now control your own destiny. We have several investing strategies focused on low risk trade such as covered calls, selling cash-secured puts, buying monthly dividend CEFs and collecting divide3nds from world-class stocks. This is the way to increase your wealth on a monthly basis.

One strategy is the Put Call Dividend (PCD) Strategy where we sell puts for income to enter a position, then sell covered calls for income while collecting dividends. This creates three income streams from a single investing position. This positions the investor in a low risk position as you can continue to create option income each month by selling puts and calls on the same stock. If the market goes up – you make income. Same for when a stock pulls back – keep selling options for income. It is like collecting rent on a rental property each month – without the hassles of a tenant.

I can’t promise you will be a Penta Millionaire, but you will definitely create more income and move toward becoming financially independent.

Learn more about getting started on your wealth journey today.

The Case for Income Investing

Today’s stagnant economy isn’t what it used to be. Societies, both individuals and governments, are saddled with enormous amounts of debt and yields have disappeared making it impossible to generate income from traditional fixed income investments.

Many top experts, including Jeff Gundlach who is considered the “Bond God,” believe this is the “new normal” and that rates could go even lower still. Which doesn’t offer a lot of hope to retirees who need income now, or future retirees who need to grow their portfolio at a much faster clip if they hope to retire at all.

Investors often overlook the value of selling options for income. This is in part because investors misunderstand the risk of these investments and how to manage this type of investment.  But many individual can benefit from these investments. If the income from selling puts and calls is reinvested every month, the investor can compound savings and buy more investments such as stocks, CEFs, etc.

This can be a growth strategy for investors no longer contributing to their portfolios or retirement accounts.  This type of portfolio of investments is likely to produce a higher yield than a growth stock portfolio. And, investors will benefit from the income even if the portfolio doesn’t have any capital appreciation or the market moves sideways. 

Investors can create a diversified portfolio for option selling by writing cash-secured puts, selling covered calls and owning dividend paying stocks and CEFs with monthly distributions.  If income is a goal, these option selling strategies and income investments could be worth a closer look.

I combine the strategies for market diversification of income opportunities.  Also, I combine then to create new investment vehicles.  The one strategy I prefer has 3 income opportunities: (1) selling put options to enter a stock, (2) collect dividends if put to me, and (3) sell covered calls until the stock is called away.

Where else, on even a modest portfolio, can you generate an extra $1,000 to $5,000 per month or more? Owning a basket of strong dividend paying blue chip stocks might earn you 3% to 5% per year. But to generate $5,000 per month in income you’d need a nest egg of $1.2 to $2 million dollars.

Get started collecting multiple streams of income today.

 

Covered Call of the Month – 26% Annualized Return on this Stock

You have heard all of the old adages about investing such as there is no free lunch and many more.  In general, these saying suggest that higher returns will always require higher risk of some type.  Still, money managers and hedge funds continue to attempt to ink out higher returns on a risk adjusted basis through a numerous variety of customized approaches to stock selection, asset allocation, hedging strategies and so on.  For them, this is the holy grail that generates higher returns than their competitors or market averages.  In my opinion, investors can simplify this process through covered call writing.

Covered call writing consists of selling call options on stock whose shares you own.  This strategy places the investor somewhere between stock ownership and fixed income investments.  While the investor owns shares, they also create income from the premium received from selling call options on those shares.  While this strategy will not produce wealth overnight, it does produce a steady stream of income while owning shares of stock.  This strategy is designed to produce an annual return in the area of 15% on conservative stocks and higher as investors write calls on higher volatility stocks.

Covered Call of the Month

Celgene (NASDAQ: CELG) ended the last trading session at $95.02. So far the stock has hit a 52-week low of $66.85 and 52-week high of $96.15. CELG has had an S&P Capital IQ 5 STARS (out of 5) ranking since 10/23/2008. On 1/13/2014 S&P Capital IQ equity analysts set a 12-Month price target of $104.00 for the stock. Celgene stock has been showing support around $93.83 and resistance in the $95.89 range.

For a hedged play on this stock, consider a Nov ’14 covered call with a 95 sold call for a net debit in the $89.77 area. The strategy has an 81 day duration, provides 5.53% downside protection and a 5.83% assigned return rate for a 26.25% annualized return rate (for comparison purposes only). This strategy has a 4 Key (out of 5) Low Relative Risk ranking.  

A Covered Call Trade on Microsoft

Investor sentiment turned strongly bearish recently as emerging markets were hit by both country-specific problems and the realization that the Fed’s trimmed bond-buying program reduces the liquidity that has boosted higher-yielding emerging market assets and put a floor under U.S. stock prices.

The broad selloff in emerging markets over the recent weeks translated into the worst week for global stocks in seven months. The S&P 500 slid 2.6 percent, its largest weekly decline since June 2012.  Still, the S&P 500 is just 3.1 percent below its record closing high.  If the bears stay put, then the market could pull back over the coming months.

Due to the selling on Wall Street, investors were willing to pay more for spot protection against a drop in the S&P 500.  At this time, investors are concerned a market pullback may be overdue.

Investors should consider looking at blue chip stocks with low betas, nice dividend yields and sell some calls for downside protection and additional income.  A good choice is Microsoft (MSFT) with a current dividend yield of 2.77 percent and a beta of only 0.78.  In addition, the Company just beat earnings estimate and year over year earnings.

For the fiscal second quarter ended Dec. 31, revenue rose 14% to $24.52 billion, partly reflecting the release in November of a new Xbox videogame console and a fresh version of Microsoft’s

Surface tablet computer ahead of the holidays.

Overall, net income climbed to $6.56 billion, or 78 cents a share, compared with $6.38 billion, or 76 cents a share, in the year-ago quarter.  Analysts, on average, estimated Microsoft would post earnings of 68 cents a share on revenue of $23.7 billion, according to Thomson Reuters.

The company said its devices and consumer revenue grew 13% to $11.91 billion, while commercial revenue increased 10% to $12.67 billion.

On November 19, 2013 the board of directors at Microsoft had approved a dividend of $0.28 per share. The dividend is payable on March 13, 2014 to shareholders of record on February 20, 2014.

The stock has landed on the “Jefferies Highest Conviction Franchise Picks for Big Upside in 2014.”  Jeffries had this to say about Microsoft in this report, “With the Xbox One poised to be one of the fastest selling gaming consoles ever, the fourth-quarter sales for the company were outstanding. Investors are paid a very solid 3.1% dividend. The Jefferies price target for the software giant is $42.”

Last week, analysts at Deutsche Bank have upgraded their coverage of Microsoft to a Buy rating from a Hold, while raising their price target on the stock to $40 from $32 a share.

Also, Microsoft has an equity summary score of 9.4 out of 10 for a very bullish outlook according to a consensus of analysts.

Investors can look at selling a call option to get some downside protection and additional premium for income.  The basics of a covered call is that an investor can sell one call for every 100 shares of stock owned.

One potential covered call trade is to sell the March or April 2014 38 call option.  Under this scenario, your Microsoft shares will be called away if the stock price is above the strike price of 38 on March 22. So the investor is giving away the stock price upside as long as they are short the call.

However, investors will receive a call premium for each call sold.  This gives the investor downside protection to around the $36 price level.  Investors will also get the $0.28 dividend.  In total, this covered call trade with the cash dividend can potentially create a 5% return over the next 2 months.

Covered Call Trades of the Month

Investors have been bracing for anything that could reverse at the last minute the market’s year-long rally, which saw the Dow and S&P 500 hit record highs again this week. The S&P 500 is up 26 percent this year and registered a sixth week of gains on Friday.  However, income investors seeking to trade covered call investments have been performing well too.

Below are two successful trades from the past month listed in the Monthly Income Plan at getrichinvestments.com .  Each month, income investors are creating income streams from selling covered call options against high quality stocks.  Here are some winning trades from the current newsletter:

Covered Call on USG Corp (USG)

STRATEGY: Look at the Nov 27 covered call. For each 100 shares of USG stock you buy, sell one Nov 27 covered call option for a $25.50 ($26.65 – $1.15) debit or better.

Actions: USG is currently trading at $27.66 at the close on 11/15 so the 27 call we sold is ITM.  These shares and call options will be called away.

This is a 5.88% return for one month and an estimated 70% annualized return.

 

Covered Call on Flour Corp (FLR)

 

STRATEGY: Look at the November 2013 77.5 covered call. For each 100 shares of FLR stock you buy, sell one Nov 2013 77.5 covered call option for a $74.89 (77.19 – 2.30) debit or better.  That’s potentially a 3.49% assigned return.

Actions: FLR is currently trading at $79.36 so the 77.5 call we sold is ITM.  These shares and call options will be called away on Friday (11/15).

This is a 3.49% return for one month and an estimated 42% annualized return.

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.

New Covered Call on this Vice Stock

Constellation Brands (STZ), together with its subsidiaries, produces and markets beverage alcohol.  The stock was reiterated with a Buy rating by analysts at Stifel Nicolaus. The firm raised its price target on the stock to $69 from $64.  STZ Thursday posted better-than-expected Q2 results and said for FY 2014 it expects EPS of $2.80 to $3.10 per share. The Street is at $2.83 per share.  STZ is up 2.3% at $61.55, near the stock’s 52-week high of $62.15.

Here is a Covered Call Strategy:

STRATEGY: Look at the January 2014 60 covered call. For each 100 shares of Constellation Brands (STZ

) stock you buy, sell one January 2014 60 covered call option for a $57.38 (61.58 – 4.20) debit or better. That’s potentially a 4.6% assigned return.

COMMENT: The technicals for STZ are bullish with a strong upward trend. The stock has had support recently around 56.50. S&P rates this stock 4 STARS (out of five) – buy.

RISK: The stock has to drop 6.8% to threaten the break even point. This trade rates 3 keys out of 5 – moderate relative risk.

RESEARCH: S&P maintains Buy recommendation on shares of STZ. On revised forward multiple analysis, we lift our target price by $2 to $66 and our FY 14 (Feb.) and FY 15 EPS estimates by $0.12 and $0.07 to $2.90 and $3.55, respectively. Adjusted Aug-Q EPS of $0.96, vs. $0.71 exceeded our estimate of $0.85 on a significantly lower tax rate and expenses than our forecast. Crown depletions rose 7% on a strong summer selling season driven by healthy growth in Corona as well as expanded distribution for Modelo Especial. As production ramps in the Piedras Negras facility, we look for margins to improve in the beer segment.

 

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/

HFC pays 8th Special Dividend and Boosts Regular Dividend by 50%

Investors looking for a regular helping of special dividends should consider HollyFrontier Corporation (NYSE: HFC). The company just announced its 8th special dividend since August 2011.  In addition, HFC just juiced its regular dividend by 50%.

Subscribers to my Get Rich Monthly Income Plan received $31.00 per share in dividends in 2012 with a yield on cost of 12.5% in one year.  In addition, subscribers received $1,690 in call premiums on each 100 shares of HFC stock in 2012.  The covered call premiums accounts for a yield of 68% as subscribers utilized a special income technique called the perpetual covered call.  In total, Monthly income Plan subscribers booked a total return of 219% on HFC in 2012 alone!

HollyFrontier Corporation (HFC) announced today that its Board of Directors approved a 50% increase in the Company’s regular quarterly cash dividend to $0.30 per share from the current rate of $0.20 per share. This is the fifth increase in the regular dividend since the merger in July of 2011, representing a total increase of 300%. The regular dividend will be paid on April 2, 2013 to holders of record of common stock on March 15, 2013.

The Company also announced today a special cash dividend in the amount of $0.50 per share. The special dividend will be paid on March 19, 2013 to holders of record of common stock on March 5, 2013. This is the 8th special dividend declared by HollyFrontier since August 2011.

HFC’s stock price is up 70% in the past year but still trades at a low PE of 7.5 which is a 60% discount to the industry average PE ratio.  HFC has an equity summary score of 9.8 out of 10 for a VERY Bullish outlook.

Mike Jennings, CEO and President of HollyFrontier, said, “Our Board of Directors remains committed to delivering value to our shareholders through both a growing regular dividend as well as special dividends. After today’s 50% dividend increase, our current regular dividend yield is 2.2%, and our trailing twelve month cash dividend yield stands at 6.1% relative to today’s closing price of $53.72. Including today’s announcement, HollyFrontier has returned almost $1.3 billion in capital to shareholders through regular dividends, special dividends and buybacks since the July 2011 merger.”

Perpetual Covered Call Year End Results

For the year 2012, we had some impressive investment returns.  The Monthly Income Perpetual Covered Call Portfolio easily surpassed both the S&P 500 and PowerShares S&P 500 BuyWrite Portfolio (PBP).  The table below displays the investment returns for each of the Perpetual Covered Call positions.  The average monthly return was 6.2%!  We had exceptional returns on HFC, CVS and JCI (see table).

Get Rich Investments - Perpetual Covered Call Trades

Click to enlarge

 

 

 

 

 

 

 

In January, we kicked off the perpetual covered call strategy. We have started adding new perpetual covered call trades each month to keep the trades fresh with market conditions and opportunities.  For those who are new to this concept, let me share the rationale of this income investment. This strategy was created to produce monthly income with stock dividends and covered call premium.  In addition, there is a protective, blanket put, to ensure the volatility in the market does not affect your return of capital.

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