Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘covered calls’

How To Make Money On Stagnate Stocks

After bottoming out in March 2009, the equities market bounced back with an impressive two-year march higher. But faster than you can say “Happy birthday, bull market,” violent clashes in the Middle East and utter devastation in Japan sent stocks reeling over a matter of mere weeks.
So, if you’re like most U.S. investors, you’ve probably got quite a few stocks in your portfolio that are now trading below freshly tagged multi-year highs. Since previous price peaks can act as areas of technical resistance, it’s only natural to be concerned about a forthcoming period of consolidation. Or, to be brutally honest — stagnation.

Fortunately, there’s a simple option strategy any investor can use to generate immediate income on his equity investments — even during those frustrating times when the market is grinding sideways.

A covered call is an option that you sell (or write) on a stock that you’re holding in your portfolio. By selling to open one call option, you’re accepting the obligation to deliver 100 shares of the underlying equity at the strike price of the option, should the stock price surpass the strike price, prior to the contract’s expiration date (in other words, should the option go “in the money”).

To build your cash-collecting call trade, take a look at a price chart of the security in question. You’ll need to pinpoint where you expect the shares to find resistance, because the strike price of your sold call(s) should generally correlate with this price zone.

In the best-case scenario, you want your sold call to expire worthless — or “out of the money” — so that you can (a) retain the entire premium received as pure profit; and (b) avoid taking any further action to close out the trade, which would rack up additional brokerage costs.

On the other hand, a call that’s too far away from the stock’s current price will barely be worth the effort. To see what we mean, simply check out the option chain of any given stock. As your eye travels over higher and higher strike prices, you’ll see the premiums begin to vanish.

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Luckily, in the age of 1-point and 2.50-point strike prices for many popular stocks, it’s much easier than ever before to find a happy medium for your focus strike.

Once you’ve selected your ideal strike price, you’ll want to narrow your focus to shorter-term options. The comparatively richer option premiums of longer-dated contracts may be tempting, but trust us — the covered call strategy is best conducted over a relatively narrow window of time.

Put simply: The shorter the time frame of your trade, the less opportunity the shares have to rally above your focus strike. Plus, the effects of time decay are more pronounced on options that are closer to expiration — and in an option-writing strategy, time decay is your best friend. As the contracts shed their time value at an accelerating pace, they’ll naturally decline in price. This means the calls will be cheaper to buy back in the event that you should decide to liquidate your position ahead of expiration.

Investors should also be aware of the stock’s historical volatility, particularly as it relates to the option’s implied volatility. Equities with relatively low historical volatility (that is, slow-moving stocks) are attractive covered call candidates, because it suggests a relatively low probability of drastic price swings that could put you at risk of assignment. When implied volatility is inflated relative to historical volatility, it points to prime premium-selling opportunities.

On that same note, though, don’t forget to check the corporate calendar. A looming event, such as an earnings report or product launch, could be the underlying cause of inflated volatility. These events can often translate to significant price changes in the underlying stock, which raises the risk profile of a sold call position.

So, having selected an appropriate strike price and expiration month, your next responsibility is to place the trade with your broker. In order to make sure this is a covered call, be sure you sell no more than one option contract for every 100 shares of stock you own. Pocket your premium, and then sit back and wait for the options to expire worthless, as you predicted.

However, following a two-year rise in the broader equities market, it’s quite possible that you’re holding a few stocks in your portfolio that have delivered healthy returns. If you’re satisfied with the gains you’ve collected and are ready to move your investing capital elsewhere, writing covered calls is a savvy way to “get paid to get out.”

Monthly Income Portfolio – June 2011

Today we started actual trading in the Monthly Income Portfolio through Thinkorswim trading.  The trading is in real time with actual market prices and commissions.  The rules are as following for this trading portfolio:

  • Enter positions by selling puts to collect the option premium.  We will not sell a put unless we have the capital to cover the stock if exercised and we are forced to purchase the stock;
  • If we are put the stock, we will sell covered calls to earn more premium from the stock.  If the covered call is exercised, we will let the stock get called away from us.  Then, we have a decision to go back to selling puts to re-enter the position;
  • We will take the gains from the monthly income and invest in monthly dividend stocks on a monthly basis.  This creates a safer method to earn monthly dividends to protect our capital while earning monthly income;
  • The portfolio will maintain a cash level of 10% in case of trade adjustments as needed.

As rules indicate, we enter positions by selling puts to collect the premium income.  We have selected 5 stocks to sell July 2011 expiration puts on: BX, COH, UA, POT and CMI.  The total put premiums collected is $4530.00 (see graphic below) for the next 30 days.  This is a 4.53% return on the initial starting balance of $100,000.  We will monitor these puts to see how the positions play out over the next month.   If these options are put to us, then we will sell August 2011 calls on the shares we own.  If option is not exercised, we will sell more puts for premium in August 2011.

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The Monthly Income Portfolio

n the past we discussed how to create a monthly income portfolio using puts, covered calls and monthly income dividend stocks.  Now, we have teamed with TradeMonster to create a paper trading account so you can follow the trades we place each month in this account.  

The account has $100,000 in cash and can trade $200,000 in total through margin. The basic rules of trading in this account are:

  • Enter positions by selling puts to collect the option premium.  We will not sell a put unless we have the capital to cover the stock if exercised and we are forced to purchase the stock;
  • If we are put the stock, we will sell covered calls to earn more premium from the stock.  If the covered call is exercised, we will let the stock get called away from us.  Then, we have a decision to go back to selling puts to re-enter the position;
  • We will take the gains from the monthly income and invest in monthly dividend stocks on a monthly basis.  This creates a safer method to earn monthly dividends to protect our capital while earning monthly income;
  • The portfolio will maintain a cash level of 10% in case of trade adjustments as needed.

This is the easiest method to learn how to create a monthly income portfolio.  We will track the performance of the portfolio on a regular basis.  The majority of trades will occur around option expiration and the following week.  We will look to trade the monthly options on the puts and covered call strategies.

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We will begin trading near the May 2011 option expiration date.  The goal of the trading account is to create a monthly income that can compound over time.  Your goal is to learn how this is done so you can create your own monthly income portfolio.  This portfolio can be created with a much lower capital than $100K.  You will just need to adjust the number of option contracts per trade to the amount of capital in your account.

Why Don’t More People Write Covered Calls

It is hard to understand why more income investors don’t use the covered call strategy more often.  Once you sell the call you have an automatic income amount set for you.  Perhaps the biggest reason more people don’t write calls is they are not aware of the strategy.  Unless you stagger upon the strategy or research it online, it is difficult to understand.

Most financial institutions do not mention covered calls as a strategy to their clients as they may risk losing business if clients pursue this strategy on their own.  These advisers are being paid commission on the amount of funds they manage so they have a conflict of interest with their clients.  Simply, they make money on the products you buy from them.

There is a certain amount of fear involving the trading of options.  Some resources lump together all option strategies as being too risky for an individual investor to use in their own portfolios.  Yet, these same “experts” will suggest you buy a small cap growth stock trading at a 100 price to earning ratio.

By producing cash flow from an asset DOES NOT increase the risk of owning the asset.  think about this: all investors should seek a return on their money which is cash flow.  Of course, if you are in the nail business you always recommend hammers!  You must realize that your interests are different from the financial institutions.  And you are the only one to focus 100 percent on your needs.  However, financial advisers make money when you do and when you don’t!  Your biggest decision is to rely on their advice or handle your own investing.

This blog believes in the individual investor and his ability to generate monthly income from writing covered calls and owning monthly dividend paying stocks.

Should You Sell Covered Calls in an Up Market?

So the stock market is up 100% or more since the low of two years ago, 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. Anybody look lately at Netflix (NASDAQ: NFLX)  Lululemon Athletica (NASDAQ: LULU),  or Chipotle Mexican Grill (NYSE: CMG)? 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) with respect to Verizon (NYSE: VZ) iPhone, 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).

Covered Calls for April 2011

It is time to begin looking at the next month (April) covered calls at this time.  I have already started a short list of potential trades.  This list is most at-the-money and slightly out-of-money calls.  I have included the S&P Ranking as well as the volatility measures on the chart.  Here is the list. with company profiles below (click image to enlarge).

Get Rich Covered Calls 2011

F5 Networks, Inc. (F5 Networks) is a provider of technology that optimizes the delivery of network-based applications and the security, performance and availability of servers, data storage devices and other network resources. Its technology is hardware and software for application delivery networking, including application security, secure remote access, policy management, wide area network (WAN) optimization and file virtualization. Its principal products are systems that integrate its software with purpose-built hardware that incorporates commodity components. In addition, it introduced a virtual (software only) version of BIG-IP called BIG-IP LTM (VE) that is designed to run on servers and work in conjunction with its systems to provide management of virtual servers and applications. Its BIG-IP product family, which represents the bulk of its sales, supports a growing number of features and functions available as software modules, standalone appliances, or both., Inc. is a provider of enterprise cloud computing applications. It provides a customer and collaboration relationship management (CRM), service to businesses of all sizes and industries worldwide and provides a technology platform for customers and developers to build and run business applications. Cloud computing refers to the use of Internet-based computing, storage and connectivity technology for a variety of different services. The Company designed and developed its offering, which can be deployed, customized and integrated with other software applications. It markets its service to businesses on a subscription basis, primarily through the direct sales efforts and indirectly through partners. In May 2010, the Company acquired Jigsaw. In January 2011, the Company acquired Heroku, the cloud platform for writing Ruby-based applications. In January 2011, the Company acquired Dimdim.
Alpha Natural Resources, Inc. (Alpha) is a coal supplier in the United States. The Company is a supplier and exporter of metallurgical coal for use in the steel-making process, and a supplier of thermal coal to electric utilities and manufacturing industries. It operates 66 mines and 13 coal preparation plants in Northern and Central Appalachia and the Powder River Basin. The Company operates in two segments: Eastern Coal Operations and Western Coal Operations. Eastern Coal Operations consists of the mines in Northern and Central Appalachia, its coal brokerage activities and the Company’s road construction business. Western Coal Operations consists of two Powder River Basin mines in Wyoming. During the year ended December 31, 2010, steam coal and metallurgical coal accounted for approximately 86% and 14% of its coal sales volume. During 2010, Alpha sold a total of 84.8 million tons of steam and metallurgical coal.
Medco Health Solutions, Inc. (Medco) is a healthcare company. It provides clinically-driven pharmacy services designed for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans. The Company opertates in two segments: Pharmacy Benefit Management (PBM) and Specialty Pharmacy. Medco’s advanced pharmacy and clinical research are part of Medco making medicine for more than 65 million members. It offers clinically-based programs that identify drug waste. Pharmacy management includes mail-order service, retail pharmacy networks, specialty pharmacy management, call center pharmacies and reimbursement services. Its Internet-based services offer sites for clients and retail pharmacists that provide interactive tools. On January 29, 2010, the Company completed the acquisition of DNA Direct Inc. On September 16, 2010, Medco acquired United BioSource Corporation (UBC).
Newfield Exploration Company (Newfield) is an independent oil and gas company engaged in the exploration, development and acquisition of oil and gas properties. The Company’s domestic areas of operation include the Mid-Continent, the Rocky Mountains, onshore Texas, Appalachia and the Gulf of Mexico. Internationally, the Company operates in Malaysia and China. Mid-Continent division is focused primarily in the Anadarko and Arkoma basins. Its Greater Monument Butte is the Greater Monument Butte field area, located in the Uinta Basin of Utah. During the year ended December 31, 2010, approximately 82% of its proved reserves and 90% of its probable reserves were located in resource plays, primarily in the Mid-Continent and the Rocky Mountains. As of December 31, 2010, Newfield had proved reserves of 3.7 one trillion cubic feet equivalent. On February 11, 2010, the Company acquired some of TXCO Resources Inc. (TXCO’s) assets in the Maverick Basin of southwest Texas.
Holly Corporation is an independent petroleum refiner that produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. The Company’s operations are organized into two reportable segments: Refining and Holly Energy Partners, L.P. (HEP). As of December 31, 2009, it owned and operated three refineries consisting of a petroleum refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the Navajo Refinery), a refinery in Woods Cross, Utah (the Woods Cross Refinery) and the Tulsa Refinery; owned and operated Holly Asphalt Company, which manufactures and markets asphalt products from various terminals in Arizona, New Mexico and Texas; owned a 75% interest in a 12-inch refined products pipeline project from Salt Lake City, Utah to Las Vegas, Nevada, and owned a 34% interest in HEP.
Vertex Pharmaceuticals Incorporated (Vertex) is engaged in the business of discovering, developing and commercializing small molecule drugs for the treatment of diseases. The Company is engaged in phase-I clinical trials and/or nonclinical activities with respect to a range of additional drug candidates, including compounds intended for the treatment of hepatitis C virus (HCV) infection, cystic fibrosis (CF) and influenza. In November 2010, the Company submitted a new drug application (NDA), requesting approval to market telaprevir in the United States for the treatment of patients with chronic HCV infection.

Passive Income Investing

Passive income is defined as “income generated with minimal work through your investments such as interest, dividends, or option premiums but also includes any income system that generates income for you!”
In order to increase your quality of life, the only realistic strategy is to increase your income, and reduce the amount of hours you work to earn income.  How do you do this you might ask? By using time tested wealth creation strategies and investment techniques to create, increase and maintain your passive income.

Passive Income Investing

The easiest way to make passive income is to earn interest or dividends on bank accounts, stocks and electronic-traded funds (ETFs).  This is one of the safest strategies when you own the right securities.  Many ETFs pay monthly dividends that can be combined to create a significant number of passive income sources or checks each month.  More on this later.


One of the best ways to leverage your investment capital is to use stock options. There are literally thousands of ways to use options, both as a trading tool and as a way to protect or hedge your investments.  But options can also be used to create passive income through becoming an option ‘writer’ instead of a ‘taker’.  Here, you get paid a premium when you sell the rights to an option.  This premium is your passive income source. 

The optimal strategy is to combine investments that make you rich with investments that keep you rich.  I refer to the former as your “get rich” account and the later as your “stay rich” account.  Basically, you make passive income from your get rich investing and store it in your stay rich investments.  It really is that simple.
Get Rich Passive Incomes
The following is a list of passive income generators you will recieve in each Passive Income Investment Report.  These investments are what you will use to get rich by investing in these instruments each month.  You will recieve a number of trades for each category but you decide which types of passive incomes you are comfortable investing in your account.
  1. Covered calls on stocks you purchase.  We have a proven system of identifying conservative covered call investments that can generate 3-5% return each month.  You can select from our list or invest in all recommendations.  Our system focuses on selecting stocks with the right volitility so you don’t get burned by high-risk investments.
  2. Calender spreads that create a credit when entered can generate passive income in the 10-15% range.  This trade involves the purchase of options of a named strike price expiring in a more distant month and the sale of options having the same strike price that expire in a more nearby month.  Time decay will create a profit with the sold option.
  3. Credit spreads involves a purchase of one option and a sale of another option in the same class and expiration but different strike prices. Investors receive a net credit for entering the position, and want the spreads to narrow or expire for profit.  These investments can generate 10-20% of income per month.
  4. The Iron Condor is an advanced option trading strategy utilizing two vertical spreads – a Bull Put Spread and a Bear Call Spread with the same expiration.  The Iron Condor offers the profit potential of two net credit premiums instead of only one. This can significantly improve the potential rate of return on capital when the trader doesn’t expect the underlying instrument’s spot price to change significantly.  Some condors can achieve 30% or more return in a month.
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