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How to Make $3,500 per Month Passive Income for Life

What could you do with $3,000 per month in passive income for life? How would it change your future? For some, it will be a total life changer to increase your income each month. For others, maybe not, but how would it affect your life if you had access to the plan that produced $3,000 per month for life?

It is clear that most people are not doing the single most effective thing that will make them rich: Investing in the stock market for passive income each month.

At Get Rich Investments, we focus on creating monthly income. We like to invest in securities that can produce 3-5% each month. One method to achieve this level of income is by trading covered calls. This trade allows the investor to sell a call option for premium income. Then, we buy a protective put to protect our downside from owning the stock.

The year 2019 turned out to be a stellar market advancement fueling significantly higher returns than 2018. Last year, Get Rich Investments had a total return of 18% compared to 10% for the S&P 500. This year, we did even better by not only trouncing the SPY but achieving an all-time high of 50% in our portfolio. The average monthly income across our open positions was nearly $200 for each position with 100 stock shares. If you own all positions (100 shares) you would capture $1,663 dollars of income per month. And, if you double up you can capture nearly $3,500 per month.

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Let us look at a couple examples, one of our better income producing stocks was Merck (MRK). Yes, I did say INCOME producing even though MRK has a modest 2.7% dividend yield. How did we turn MRK into a cash machine? Simply, selling monthly covered call throughout 2019. In total, we received $165 dividends for each 100 shares of stock. However, we earned a total of $2,180 in call option premium (13X the dividends). At yearend, our income yield (including both dividends and call premium) was 32%.

Tell me where else you can find a yield this high! We had over 8 stocks in our portfolio with this level of performance in 2019.

To get started, you can join the Monthly Income Plan that offers a list of high yield covered calls and monthly dividend stocks. You can easily make 10X your subscription fees and change your life.

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Why Buy and Hold Investing Doesn’t Work for All

If you are starting your investing journey than you should consider the best methodology to achieve your objectives. Some popular theories include John Bogle suggesting to buy 50% in a stock index and 50% in a bond index. This is a set and forget move that only requires periodic rebalancing. I am sure this works for many investors. Then, there is the buy stocks for the long haul like Warren Buffett and others to let them appreciate in value and grow dividends over the lifetime of your portfolio.  Most investors subscribe to this theory for managing their investments. I prefer to more actively manage my portfolio and focus on multiple steams of income.

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You may have heard the old adage that the best way to make a small fortune is to invest a large fortune. Another one is that the most difficult time to invest is always now. Mark Twain famously considered every month of the year was peculiarly dangerous for investing in stocks. And there is the wall is a thoroughfare that begins in a graveyard and ends in a river.

Sometimes Wall Street analysts urge the public to buy stocks they know are poor investments as they are probably selling in private deals. Insiders can play games using their superior information because they hold insurmountable advantages. Even Jim Cramer has acknowledged how easily stocks are manipulated by big-time money managers.

To some, this theory is referred to as buy and hope.

As you learned from the past two decades, stocks don’t always go up. Remember the market downturn not so many years ago. Some people buy stocks at the end of a bull market after listening to the crowd full of bull market stories for years only to watch their stocks for years through a bear market. If you are in your 30’s this may not be a concern. But if you are approaching middle age or retirement, do you have time to wait out a secular bear market?

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The market went up an average of 8-9% in the last century but the key word here is this is an average. There have been periods of time when stocks turned in negative returns for several years. I know retirees who had their portfolio cut in half by market corrections. At that age, you no longer have the wherewithal to make earnings via working. A history lesson in it toke 20 years for the market to make gains after 1966. The latest bull market is being fueled by those prepping for retirement but eventually they will spend those dollars during retirement. You know what this means for the market.

Picking stocks that will last a lifetime to grow in value and appreciate in price is tough. We had debacles such as Enron and others and today bell weathers such as GE are in trouble. Yet to get rich in these stocks the security must perform well in all areas. Most of these stock picks are based on the fundamentals of the stock. However, there are many factors that affect long-term success such as changes in technology and markets. I am thinking of Amazon, Google, Facebook, Netflix and others. Where have all the books stores gone? Who was the major search engine before Google? Why are brick and mortar retailors going away because we shop on Amazon?

In general, buy and hold does not produce income. Stocks just lying around the portfolio doesn’t produce any cash flow unless they pay dividends. Growth stocks that are likely your home run stocks usually don’t pay dividends. If you asked a successful entrepreneur their opinion of tying up precious cash in a non-producing investment for years with the risk of a bear market, what will they say? They will probably tell you it is all about the cash flow. When income is not being produced, you are hoping stocks will increase enough over time to produce wealth.

The buy and hold investing ties up your capital without producing income to use in your life. If stocks are higher, then you can sell them, take gains and access the money. But if stocks are down, you are digging into your capital in order to get your hands on some cash. And it is all because stocks are not producing income.

Then there is the value investors. You know them, they buy low and sell high to capture the true value of the stock. Generally, the market moves all boats and your value investment will likely flow with the tide. Value is a relative term based on the perception of the assets as all do not agree on the correct value. Therefore, you had better be right if you are a value investor. Some stocks may be value plays for years!

Wall Street tends to be traders so they don’t do buy and hold investing but you are listening to their recommendations. Odd that Wall Street would tout a strategy they don’t follow themselves. There no mystery that Wall Street needs buyers for stocks. They turn their money generating cash flow all the time. Shouldn’t you?

Remember seeing two market crashes with one in 2000 and the next in 2007 with a span of 10 years. Some investors were ruined twice within a decade. With stocks at all-time highs, when will the next crash happen? Are you prepared to protect your capital?

The smartest strategy would be to buy stocks that pay dividends at the market bottom in 2009. You get the market rebound and cash flow from income. You may have picked up yields of 5% or more during this period.

Then, the best approach would be writing calls on your portfolio stocks to generate more income. A declining market is a perfect time to write calls on a long-term holding. The stocks are declining anyway so why not produce income out of them?

Instead of buy and hope investing, you should try income investing using a conservative approach that can produce an average monthly return of 3-5% which builds wealth quickly using dividend stocks. Think about it, you get dividends from the stock and premium income from writing covered calls.

Imagine that: you can force a stock to generate excellent income – paying you rent – while defining and limiting risk at the outset. And you can choose how much risk to undertake.

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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.

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Selling Time Value of Options

When selling time value, you will use a different philosophy than those stock investors looking for a stock to go up in price.  Your gains will come from the time value of the options you will sell.  This approach to stock selection is unusual.  Most investors use fundamental analysis or technical analysis while you will use the time value of s stock’s options, tempered by fundamentals and long-term hold principles.

Deciding to create a covered call trade requires choosing an expiration month and strike price.  Option strategies require making modifications during the life of an option trade.  The option expiration month you select will have significant impact on the success of any option trade.

There are at least four different expiration months available for every stock on which options trade.  Initially, the CBOE set up only four months for options but later LEAPS were introduced so it was possible for options to be traded for more than four months on stocks with LEAPS options.  When stock options first began trading, each stock was assigned to one of three cycles: January, February or March.  Stocks assigned to January cycles will offer options in the months of January, April, July and October.  The same quarterly sequence will hold for the February and March option cycles.  Under the new rules, the first two months are always available but for the later months the original option cycles are used.

To select a stock for your covered call portfolio, you must have available a current option chain list.  You can select the expiration month based on the time value of the stock options and the strike price.  Then, if the stock meets your stock selection criteria, but it as the underlying stock in your portfolio.

To get an annual return of 20% or more, you must find available options with time value that will produce a 2% return each month or 5% each three months on the price of the stock.  Using the option chain list, you can calculate the percentage of stock price that the time value represents.  Of all the optionable stocks, you can find at least 5 to 10 stocks to consider.  If the time value seems attractive, then look at the fundamental and technical analysis to make your decisions.

Personally, I like to sell an option in the current or next month with a time value return of no less than 3%.  However, I will caution all covered writers  to proceed with caution if the time value return is very high as usually there is something pending with the underlying stock such as a news event, earning  release and other items.  Volatility can play a significant role in the pricing of options so the higher priced time value options usually have a significantly higher volatility.

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Support and Resistance levels for the Covered Call Writer

One of the keys to covered call writing success is knowing how to determine support and resistance levels.  A support level is a stock price low that the price has hit and recovered from to advance back up due to more buying than selling of shares.  This is referred to as the trading floor until a stock price breaks below it.  The resistance level is a higher level that the stock price has hit and pulled back due to more selling than buying of shares.  This ceiling acts as resistance that the stock price must break through to advance higher.

The more times the price has hit a support or resistance level, the stronger it is and more difficult to move through it.  The longer it takes for the stock to test
these levels, the stronger they are to break through.  For example, an intraday test is not as strong as a one week test of these levels.  The higher the stock volume at the level, the stronger the level is holding.  For example, if volume is above average and the stock price doesn’t break out then the level will hold and be more difficult to go through.

Most technicians draw the support and resistance levels at the lowest and highest price points on a stock chart.  If stock price reached a certain support or
resistance level multiple times, you can safely disregard a single price spike above or below these levels.

How can the covered call writer use these support and resistance levels.  If a quality stock has successfully tested the support levels, then you know where the price bottom is for that stock.  You can also use the support level to tell you when to react as a break below support requires a new decision on what to do with your covered call – close it, roll out, etc.  The other use of support and resistance for the call writer is to delay entering a new trade when a support or resistance level is being tested.  These price points should be watched closely to see if they hold.  If they do not hold, then be prepared to make
a decision on managing the covered call trade.

As income investors, we seek to create consistent monthly income by selling options to collect monthly premiums. We focus on the Monthly Income Report which is published the weekend following option expiration each month. To supplement members, we will publish additional trades and income opportunities

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Should You Sell Covered Calls in an Up Market?

So the stock market is up and at record highs, should you still sell covered calls?  The answer is yes because stocks don’t move up in a straight line as there are many up and downs along the long-term trend.  Here are six reasons why you may want to consider selling covered calls in a rising market:

1 — Momentum
Maybe a stock has risen more than the market recently and the momentum traders are doubling down. In doing so they usually increase the call premiums to where they’re just too juicy to not try a deep in the money buy-write. These can be highly volatile so it is probably wise to keep the durations short (i.e. sell the near month, and not four to six months out).

2 — Pending News
Before a big news announcement, for example, Apple (NASDAQ: AAPL), or any company before an earnings announcement) the option premiums tend to increase. Rather than buying into the hype, consider selling the hype by selling covered calls. The amount in- or out-of-the-money should scale with your opinion of which way the news will fall.

3 — Margin
When trading on margin you need to be extra careful. You can get hurt quickly if there is a sudden move against you. One way to increase your protection is by selling deep in-the- money calls. You may still lose money if there is a dramatic move down, but the call premium should buy you time to exit the position (if you need to) with fewer losses than you would have had if you had merely held the stock long.

4 — Taking some off the Table
Don’t be too greedy. After you’ve had a nice run in a stock it is prudent to either (1) sell a portion of the stock, or (2) write some calls against it so that if it gives back some of its recent gains you can capture some profit from the call premium. Often these can be combined by selling covered calls that are in-the-money on the portion of the stock you want to sell anyway. That way you eek out a bit more profit from the position. Or, if you’re still very bullish then try selling some near-term out-of-the-money covered calls.

5 — Partial Cover
If you can’t make up your mind whether you should cover the entire holding, then consider selling covered calls on part of your position. You’ll end up being half right and half wrong at the same time, but at least you won’t have been all wrong.

6 — Monthly Income
If you have core holdings that you plan to own for the long-term then why not write some out-of-the-money calls on them to generate some extra income (even if they’re rising in a bull market)? Depending how far out-of-the-money you choose, you may need to sell several months worth of time instead of near-month (to cover the transaction costs).

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Trading a Calendar Spread with LEAPS

Previously, we posted information on doing a covered call using a LEAPS option. Call calendar spreads are similar to a covered call. One part of the call calendar spread is buying a LEAPS call instead of owning the stock. Then, we can sell call options (like a covered call) with less time to expiration (the calendar part). For example, we can buy a call LEAPS with two years of time and sell a call option in the next month. It the strike price of the LEAPS is the same as the call sold, then you have created a call calendar spread. It the strike prices are different, then we have created a diagonalized calendar spread.

My preference is to buy a LEAPS that is in-the-money. This gives you a higher delta so you captured more of the stock price move. A good target is to buy a LEAPS call with a delta of 0.70 or higher. If the stock makes a strong up move, then you gain more profits in the LEAPS call. Also, ITM LEAPS give us more choices in what strike prices to sell the call. In comparison to a covered call with stock, we DO NOT want to e exercised in the LEAPS position. The reason is simply that we do not want to lose the time value of the LEAP call. You can buy an ATM or OTM LEAPS call, but your delta will be lower and it is more difficult to sell a call until the stock price moves up.

When I sell a call, I like to sell the shortest amount of time available because it will decay faster (more profit per day due to time decay) than a call with several months of time. I like to use the existing month and the next month for call sells. I like to sell an OTM call when holding a LEAPS because the call sold is all time value.

The bottomline: Your returns will be leveraged. For example, you may get a 3% return on a covered call but that same return will be 12% if your underlying is a LEAPS instead of stock. Since we are using LEAPS, if the short call strike price is above the stock then it will expire worthless. You can then sell a call against the LEAPS for the next month. If the stock price is greater than the short call, you can back back the short call or roll it up to a higher strike price.

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How To Use Volatility in Selecting Covered Call Trades

If options were always fairly priced, then we would expect the option price to always imply a level of stock volatility that is more or less in line with historic volatility (HV).  But this not always the case.  For example, two stocks are trading at $20 each with current month calls at $20; one calls ask price is $1.00 while the other is at $2.00.  In comparison, one calls value is twice the others. Why? The difference is in implied volatility of the two stocks.

Implied volatility is the market’s perception of how volatile a stock will likely be in the future.  A covered call trader must understand how implied volatility affects their trading  decisions.  IV Can be the same as historical volatility, lower than historical or higher than historical.  What if an option has an implied volatility of 70% while the stock had a volatility of 25%?  The Black-Scholes calculation would tell us that the option is overpriced.

The key to covered writes: how implied volatility compares to historical volatility.  When option volatility (call IV) is lower than the 10-day/30-day historical volatility, then the call option is under priced.  For call writers, under priced options mean you are not being paid for the stock’s actual volatility.  However, if the calls IV is extremely higher than historical volatility, the market is expecting something to happen.  If after the event the IV collapses then the calls value will collapse.  But…

You should not chase the high IV because those stocks are too risky.  You should compare IV to both the 10-day and 30-day historical volatility.  This will tell you if the the IV is in line with HV.  Generally, you do not want IV to be significantly higher (10-15%) than either 10-day or 30-day historical volatility.

 

The rules are as follows:

  • If IV is higher than HV – then an event is projected such as news, earnings, etc. Find another stock to write calls on;
  • If IV is lower than HV – then the option is likely under priced so you should Find another call write trade;
  • If IV is in line with HV – then this is a good trade if stock volatility is below 40%.

For conservative covered calls, you want stock volatility below 40%.  Any stock with a volatility above 60% is too risky for a covered call trade.  

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How to Use LEAPS as Stock Replacement

Some investors are getting started with a small account.  However, these investors want to make some extra cash to pay some bills or to build up their capital.  They can sell calls on lower priced stocks as it takes less capital to purchase 100 shares of stock.  This is not the only way to achieve income on a smaller portfolio.  They can use LEAPS (long-term equity anticipation securities) as a stock replacement in covered call trades.

Just like a covered call trade, LEAPS (yes it always has an “S” which stands for security) can be purchased instead of the underlying stock which a call can be sold against to provide income.  LEAPS are similar to options except they have a longer time to expiration.  LEAPS usually expire from 1 to 3 years from the time of purchase.  The tradeoff is that you can purchase a LEAPS with 1-3 years of time at a lower cost than purchasing the stock.

The risk profile is very similar between a stock purchase or a LEAPS.  If you buy a stock for $50 then your risk is $50.  The same is true for a LEAPS.  If you buy a LEAPS contract for $20 then your risk is $20.  In both cases, your total investment amount is at risk.  The big difference is that LEAPS have an expiration date while stocks do not.  Since LEAPS have an expiration date, they can be purchased at a lower price than the underlying stock.

When you purchase a LEAPS contract, you control 100 shares of the underlying stock.  Just like a option call, LEAPS give you the right, but not an obligation, to purchase the stock at any time before expiration at the strike price you purchased.

For example, Pepsi (PEP) is trading at around $69.00 at this time.  Your cost to purchase 100 shares of UA will be $6,900.  You can purchase a Jan 2013 call at the $70 strike price for $4.35 per contract. This LEAPS will cost a total of $435.00.  This is a significant difference in the initial investment that is at risk.  The January 2013 call has 556 days until expiration.  You now have the right to purchase 100 shares of Pepsi stock at $70.00 anytime over the next 556 days.

To complete a covered call on PEP, you can sell one August 2011, 38 days til expiration, call at $0.84 per contract.  This is $84.00 in income for a total investment of $435.00.  This is a static return of 19.31% over 38 days.  This is extreme leverage that LEAPS offer to the investor.  If you purchased the stock instead of a LEAPS, your return would be 1.22% because your investment would be $6,900.  Also, your risk would be $6,900 for the stock versus just $435.00 for the LEAPS.

The bottom line: LEAPS lower your total investment compared to the underlying stock and leverage your total return potential.  This is great for those wanting income when investing with a small portfolio or those wanting to leverage their return.

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8 Tips to Becoming a Millionaire

We at Get Rich already know the path to wealth is having multiple streams of income that we create each month using covered call trades and monthly income dividend stocks.  This article from Entrepreneur magazine captures the tips we live by each day.

See the full article here

Millionaire. It’s a title that plenty of us would love to have. But, is that actually feasible?

Believe it or not, becoming a millionaire is a goal that can be achieved this year. In my life, I have been a millionaire several times. Most of the time before my 30s, however, I gambled my money away on cars, homes and a lifestyle I had no reason to be living.

Despite the chance that you too will blow millions, the process for you or anyone to become a millionaire has been consistent over the years. If you follow these eight valuable pieces of advice, I can guarantee that eventually you will become a millionaire. Here’s to making this happen this year!

Develop a written financial plan.

One of the main reasons why someone can never become a millionaire is that they haven’t written a financial plan. Developing a financial plan forces you to take action, instead of just talk. It also guides you in making the right decisions in order to achieve all of your dreams and goals.

Financial planner Scott D. Hedgcock said that, “When planning for a more secure future there are two inputs that are indispensable: how much money you have and how much money you spend.

Increase your streams of income.

After studying the very wealthy for five years, author Thomas Corley discovered that 65 percent of self-made millionaires he studied had three streams, 45 percent had four streams and 29 percent had five or more streams. This could include starting a side business, working part time, making investments and renting out everything from your home to your car to household items.

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