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Option Basics – What Vega Means to the Covered Write

Vega measures the sensitivity of the price of an option to changes in volatility. Vega is the estimate of the change in theoretical value of an option for the 1% increase in implied volatility. A higher volatility means higher option prices while a lower volatility means lower option prices. Vega is the measure of changing volatility on option prices. A higher volatility means an expected higher price swings in the stock.

An increase in volatility will increase the price of options on the stock while a decrease in volatility will cause all options on the stock to decrease. The vega of a long call or put option is always positive while the short calls and puts are negative. At-the-money (ATM) options have the highest vega so they are most sensitive to volatility changes. The further an option goes ITM or OTM, the smaller its vega will be. As volatility decreases for ITM and OTM options, vega is unchanged for ATM options. Vega decreases when time elapses similar to call premium decay. This causes vega to be higher for long dated options than short dated options. Of course, LEAPs have a high vega so an increase in volatility will raise the time value of the option.

For example, a stock that is trading at $35 with a high volatility of .75 with a vega of 30%. The stock option will lose $.30 for every 1% decrease in volatility and gain $.30 for every 1% increase in volatility. If volatility decreases by 20 points, then the stock option will decrease by $6.00. This suggests that you do not want to buy any call or put with a high volatility. Vega can cause option prices to change even if the stock price does not change.

Typically, I do not use vega in covered call trades as I tend to only sell options on stocks below 40% volatility and usually in the current option month. However, vega is important if you use LEAPs as a replacement for stock in a covered call trade.

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Using a Protective Put to Prevent Investment Losses

At Get Rich Investments, we create investing strategies to capture monthly income. This may take the form of covered call trades, cash-secured put trades, CEFs for monthly dividends and other strategies. However, as the market volatility increases such as we have experienced lately, investors get worried about protecting their capital. We do have an answer which is an effective strategy. It is called a protective put trade to protect against losses during a price decline. We like to also combine the protective put with our covered call strategy to have our income and protect our capital at the same time.

Please don’t take my word for it , here is how our friends at Fidelity Investments describe using a protective put.

There are two types of options: calls and puts. The buyer of a call has the right to buy a stock at a set price until the option contract expires. The buyer of a put has the right to sell a stock at a set price until the contract expires.

If you own an underlying stock or other security, a protective put position involves purchasing put options, on a share-for-share basis, on the same stock. This is in contrast to a covered call which involves selling a call on a stock you own. Options traders who are more comfortable with call options can think of purchasing a put to protect a long stock position much like a synthetic long call.

The primary benefit of a protective put strategy is it helps protect against losses during a price decline in the underlying asset, while still allowing for capital appreciation if the stock increases in value. Of course, there is a cost to any protection: in the case of a protective put, it is the price of the option. Essentially, if the stock goes up, you have unlimited profit potential (less the cost of the put options), and if the stock goes down, the put goes up in value to offset losses on the stock.

Let’s highlight how the protective put works. Assume you purchased 100 shares of XYZ Company at $50 per share six months ago. The cost of this trade was $5,000 ($50 share price multiplied by 100 shares).

The stock is now trading at $65 per share, and you think it might go to $70. However, you are concerned about the global economy and how any broad market weakness might impact the stock.

A protective put allows you to maintain ownership of the stock so that it can potentially reach your $70 price target, while protecting you in case the market weakens and the stock price decreases as a result.

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When the stock is trading at $65, suppose you decide to purchase the 62 XYZ Company October put option contract (i.e. the underlying asset is XYZ Company stock, the exercise price is $62, and the expiration month is October) at $3 per contract (this is the option price, also known as the premium) for a total cost of $300 ($3 per contract multiplied by 100 shares that the option contract controls).

If XYZ continues to go up in value, your underlying stock position increases commensurately and the put option is out of the money (meaning it is declining in value as the stock rises). For instance, if at the expiration of the put contract the stock reaches your $70 price target, you might then choose to sell the stock for a pretax profit of $1,700 ($2,000 profit on the underlying stock less the $300 cost of the option) and the option would expire worthless.

Alternatively, if your fears about the economy were realized and the stock was adversely impacted as a result, your capital gains would be protected against a decline by the put. Here’s how.

Assume the stock declined from $65 to $55 just prior to expiration of the option. Without the protective put, if you sold the stock at $55, your pretax profit would be just $500 ($5,500 less $5,000). If you purchased the 62 XYZ October put, and then sold the stock by exercising the option, your pretax profit would be $900. You would sell the stock at the exercise price of $62. Thus, the profit with the purchased put is $900, which is equal to the $500 profit on the underlying stock, plus the $700 in-the-money put profit, less the $300 cost of the option. That compares with a profit of $500 without it.

As you can see in this example, although the profits are reduced when the stock goes up in value, the protective put limits the risk to the unrealized gains during a decline.

We continue to identify winning option trades to generate income and to exit early as the stock bullish patterns moves prices higher.

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Close This Trade for 450% Gain

2/1/2018 – MOD closed at $24.30 per share today. Buy to close the MOD 22.5 PUTs at $0.20 per contract.  This is a gain of $0.80 per option in 3 trading days. This is a 3.7% gain or 450% annualized return.

1/29/2018 – Get Rich Subscribers Release (NEW Trade)

As income investors, we seek to create consistent monthly income by selling options to collect monthly premiums. This has been successful for our investors for years. Option selling offers another method to diversify investing strategies beyond traditional dividend investing. We have combined technical stock events with our strategy to identify high returns option selling opportunities. This income trade will generate a return of more than 93% annualized.

Stock: Modine Manufacturing Company (MOD) develops, manufactures, and markets engineered heat transfer systems and heat transfer components for use in on- and off-highway original equipment manufacturer vehicular applications.

The RSI is above 50. The MACD is positive and above its signal line. The configuration is positive. Moreover, the stock is trading above both its 20 and 50 day MA (respectively at 21.53 and 21.73).

Chart: We have detected a “Symmetrical Continuation Triangle (Bullish)” chart pattern formed on Modine Manufacturing Co (MOD on NYSE). This bullish signal indicates that the price may rise from the close of 23.25 to the range of 26.70 – 27.50. The pattern formed over 43 days which is roughly the period of time in which the target price range may be achieved. Modine Manufacturing Co has a current support price of 21.15. No resistance level has been found.

Strategy: We have an opportunity to sell options for income with MOD as the stock should trade higher in the coming weeks. I recommend to place your trade and exit when you have locked in profits due to the stock price moving higher. Our goal here is to make income short term so we can exit and compound capital into another trade.

For medium risk option trade, look to sell a February 2018 22.5 PUT for about $1.00. This creates a return of 4.6% to expiration (18 days) or greater than 93% annualized.

For a conservative trade, you can setup a covered call trade. You can purchase 100 shares of MOD and sell a February 22.5 CALL option for about $1.75 for an assigned return of 4.6% in 18 days.

We continue to identify winning option trades to generate income and to exit early as the stock bullish patterns moves prices higher.

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Dividends Are Losing Their Allure

Investors have long looked to dividend stocks as a means to generating investment income.  For decades this has been an effective strategy to increase cash from investing. However, in today’s market investors are more uncomfortable on how to identify new income opportunities.  They should consider allocating a portion of their portfolio to selling options for premium income.  The returns can be as high as 5% or more in a single month using the stock breakout strategy.

In a recent article published in the Wall Street Journal, “Dividends are losing their allure due to rising rates”, there is a case that yields are too low in today’s market. Here is an excerpt:

A heated stock market rally combined with a sharp climb in benchmark interest rates this year is eroding the relative value of companies that pay out chunky dividends to their shareholders.

Low interest rates over the past few years have boosted the attractiveness of high-dividend stocks that offer up income at a time when bond investors were earning next to nothing. For some sectors, that was a key reason to invest. But recently that’s reversed.

As the S&P 500 has climbed, the share of investment gains coming from collecting those dividends has been falling. The S&P 500′s so-called dividend yield over the last 12 months was at 1.73% Tuesday, its lowest since 2011. 

Let’s exam what a 1.73% yield means to an investor.  This means an investor will earn 0.4325% each quarter or 0.144% each month.  Based on having $10,000, an investor would earn $173 per year or $14 per month. What can one do with $14 per month or $144 if you invest $100,000? Not MUCH!

For investors seeking monthly income, there is a better way to create cash with your investment portfolio.  At Get Rich Investments, we have produced returns of 5% or more in a month which is an annualized return of 60%.  You may ask if this is a risky investment to achieve such a great return.  While all investments have some level of risk, this investment rewards the investor with a significantly higher return.

We achieve these returns by selling PUT options (cash-secured) or CSPs on stocks trending higher due to stock breakouts.  By selecting stocks with upward movement, it decreases the risk in the investment. This is the secret sauce to high returns using option selling strategies. When the stock moves higher, investors can exit the trade to lock in profits. Then, compound their capital weekly or monthly. This is how investors can create a monthly income far greater than dividend stocks without the risk of chasing penny stocks.

Here are some recent trades producing high returns for monthly income:

We have a fast winner in $FINL as the stock had a big pop today – up over 12%. I suggest investors to buy-to-close this trade at ~$0.20 per option or less.  This gives us a nice 9% profit in 4 days or over 800% on an annualized return!

We have a another winner in $BEAT as the stock has moved higher to $31.75. I suggest investors to buy-to-close the 29 PUT trade at ~$0.20 per option or less.  This gives us a nice 3% profit in 5 days or over 200% on an annualized return!  There will be more trades moving into next week after the holiday.

The market was in a blast mode last month as it ran to record highs again. We had all winners this month with max income trades. And how about the monthly returns on the PUT trades – 4.8% on ARRY; 8.8% on TLRD; 9.6% on NL; and 8.7% on MDXG!!! This is a yearly return on some buy and hold stock investments in a monthly trade for us. We will look for more stock breakouts for PUT trades in our next newsletter.

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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.

We continue to identify winning option trades to generate income and to exit early as the stock bullish patterns moves prices higher. Try our monthly income plan as you will definitely enjoy the extra cash.

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Covered Call Results in 2017 – You Can Make $2000 per Month

The year 2017 was another great year of total returns and monthly income. We had a call yield of 21% for our portfolio. You can’t get this level of yield from a dividend payment.

In terms of total return as tracked in the monthly spreadsheets, the average across all positions was 37% during 2017. In the past year ending 12/15, the S&P 500 only returned 20%. Therefore, we almost doubled the S&P while capturing significant alpha return. The average monthly income across our open positions was $132 for each position with 100 stock shares. If you own all positions (100 shares) you would capture $953 dollars of income per month. And if you double up you can capture $2,000 per month. You get it – $4,000 per month is achievable.

We had no losing positions in our perpetual call portfolio in 2017. We had 8 of 9 positions with returns greater than 20% and all but one with returns greater than 20% of the S&P 500 in 2017.

The table below shows the results for each perpetual covered call position during 2017. 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.

Option Basics – Option Premium

The premium is the price paid or received for an option.  Options are traded much like stocks with the bid and ask prices as shown:

  • Seller receives the bid price;
  • Buyer receives the ask price;
  • The marker marker keeps the spread between bid and ask prices.

The premium refers to the total amount received for selling the option contract not the option price.  The premium means the option’s contract price on a per share basis.  For example, if the option contract price is shown as $1.25, this means you receive $1.25 per share or $125.00 per contract ($1.25 * 100 shares).  

The premium can be intrinsic and time value.  Intrinsic value is the portion of premium that is in-the-money.   Time value is the portion of premium that is not in-the-money which is also known as “extrinsic value.”  Time value is the amount upon which the return is calculated in covered call writing.  The equation is:

Total Premium = Intrinsic Value + Time Value

Calculating time value and intrinsic value is simple.  You calculate the intrinsic value portion of the option premium, then the remainder is time value.  The entire premium of an ATM or OTM call option will to 100% time value.  The real value of option premium for sellers is the time value portion of premium.  The profit in covered call returns lies solely in time value.  

Parity simply means that the option is trading at intrinsic value which occurs to ITM options.  Options seldom trade at a few pennies below parity.  ITM options then to trade at parity when they are close to expiration or there is no expected volatility in the underlying stock.

Time decay means that the time value portion of the option premium will decay or shrink as time runs out.  The intrinsic value never decays due to the passing of time.  Time decay increases as the option nears expiration as time decay accelerates in the last 30 days of the options life.  people who write covered calls in the current expiration month are seeking income from time decay.  Remember, time value is on the side of the option seller not the buyer as time destroys the option premium of the buyers investment.

Theta is the expected change in an option premium for a single day’s passage of time.  If all other factors are the same, then option premium will be lower the next trading day by the theta value of the option.  Theta expresses time decay as an options time value.

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Income Trade for 70% Return

As income investors, we seek to create consistent monthly income by selling options to collect monthly premiums. This has been successful for our investors for years. Option selling offers another method to diversify investing strategies beyond traditional dividend investing. We have combined technical stock events with our strategy to identify high returns option selling opportunities. This income trade will generate a return of more than 70% annualized.

Stock: Teck Resources Ltd is engaged in the business of exploring for, acquiring, developing and producing natural resources. The Company’s activities are organized into business units that are focused on steelmaking coal, copper, zinc and energy. It operates in five segments: steelmaking coal, copper, zinc, energy and corporate. The corporate segment includes all of its activities in commodities other than copper, coal, zinc and energy.

The RSI is above its neutrality area at 50. The MACD is negative and above its signal line. The MACD must break above its zero level to trigger further gains. Moreover, the stock is above its 20 and 50 day MA (respectively at 21.51 and 21.89).

Chart: We have detected a “Double Bottom” chart pattern formed on Teck Resources Ltd (TECK). This bullish signal indicates that the price may rise from the close of 22.42 to the range of 23.90 – 24.30. The pattern formed over 18 days which is roughly the period of time in which the target price range may be achieved. Teck Resources Ltd has a current support price of 21.22 and a resistance level of 22.93.

 

 

 

 

 

 

 

Strategy: We have an opportunity to sell options for income with TECK as the stock should trade higher in the coming weeks. I recommend to place your trade and exit when you have locked in profits due to the stock price moving higher. Our goal here is to make income short term so we can exit and compound capital into another trade.

We are selling PUTs to take advantage of the stock price move to the upside. For conservative traders, you can create a covered call trade using the call for downside protection.  Before you can become a millionaire, you have to start thinking like one.  It isn’t just a pathway to wealth.  It’s a way of life… a belief system… a mindset – and it will show you how to build a full, rewarding life.

Join our Monthly Income Newsletter to get this trade and many other income trades.

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From $5K to $1 Million By Selling Options

Many investors ask me how much money is require to start investing and to become a millionaire. As we all know from our simple start in life, you can grow from a humble beginning to achieving financial success and independence. This is what we focus on with our monthly income trades with subscribers. Here is a recent headline from a CNBC interview with Ron Baron:

Any patient investor can turn $5,000 a year into nearly $1 million, says billionaire investor Ron Baron. “You have to have a small amount of money and invest it regularly for a long time,” Baron says. “It’s all about compounding,” the Baron Capital founder says, referring to the power of making regular investments and reinvesting the returns.

You have undoubtedly heard it said before – compounding returns is the eighth wonder of the world or man’s greatest invention. But to an investor it is a great wealth builder. While many income investors think of compounding dividends, this can also be accomplished by option sellers by compounding the option premium received by selling either put or call options. I think about the premium received as soon as the option is sold can be readily reinvested or compounded immediately.

Here is the formal definition from Investopedia:

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest.

The “Rule of 72” is an easy way to calculate how long it will take to double you money based on compounding returns. For example, an investor has a dividend stock paying an annual 5% dividend. Using the rule of 72, dividing 72 by 5 indicates the investor will double his money in 14.4 years. Not bad for a dividend producing asset. Now, let’s compare this to selling options. If you make 2% per month on average, you can double you money in 36 months (72/2=36). This is only 3 years compared to 14.4 years for the 5% dividend stock! Which investment do you want to pursue?

This is the theory behind our strategy to sell puts and covered calls at get rich investments. We can generate consistent income on a monthly basis that will provide us the opportunity to compound our money and returns at a faster pace than the buy and hold dividend investing.

Learn how to compound your money and the best stocks to use in this strategy to move from $5,000 to $1 million.

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Income Trade for 45%

As income investors, we seek to create consistent monthly income by selling options to collect monthly premiums. This has been successful for our investors for years. Option selling offers another method to diversify investing strategies beyond traditional dividend investing. We have combined technical stock events with our strategy to identify high returns option selling opportunities. This income trade will generate a return of 45% annualized. We are coming off great trades such as RES and STM.

Stock: Gaslog (GLOG) is an international owner, operator and manager of liquefied natural gas (LNG) carriers. The Company provides support to international energy companies as part of their LNG logistics chain. The Company’s owned consolidated fleet consists of 27 LNG carriers, including 22 ships in operation and five LNG carriers on order.

Trend: We have detected a “Continuation Diamond (Bullish)” chart pattern formed on GasLog Ltd (GLOG). This bullish signal indicates that the price may rise from the close of 17.45 to the range of 22.00. The pattern formed over 244 days which is roughly the period of time in which the target price range may be achieved. GasLog Ltd has a current support price of 16.80 and a resistance level of 17.60.

Strategy: We have an opportunity to sell options for income with GLOG as the stock should trade higher in the coming weeks. I recommend to place your trade and exit when you have locked in profits due to the stock price moving higher. Our goal here is to make income short term so we can exit and compound capital into another trade.

For medium risk option trade, look to sell an November 2017 17.5 PUT for about $1.00. This creates a return of 6.0% with 49 days to expiration. This is an annualized 45% return.

For a conservative trade, you can setup a covered call trade. You can purchase 100 shares of RES and sell an November 17.5 CALL option for about $0.80.

We continue to identify winning option trades to generate income and to exit early as the stock bullish patterns moves prices higher.

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