Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘covered write’

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

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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.

How to Make Monthly Income in a Sideway Moving Market

Expectations for the third quarter earnings were dismal, with forecasts for a decline in profits from a year ago.  But a recent flurry of high-profile reports has investors scowling at the weak revenue numbers, adding to worries about the state of the U.S. economy and the outlook for corporate America.

IBM, General Electric and Microsoft fell short of revenue expectations, creating a sour mood early in the third-quarter reporting period.  This has led to a market that is moving nowhere too soon.  For the last month (Sept 24 – Oct 19), the benchmark S&P 500 Index is only up 0.4% while the PowerShares S&P 500 BuyWrite Portfolio (PBP) is down 0.95%.

Where can income investors go for monthly income in a sideway moving market?

One option is to look at a covered call strategy for monthly income.  A covered call strategy provides income from the premium received when a call option is sold against 100 shares of a stock.  In general, a covered call makes money when the stock price goes nowhere (like today’s market), when the stock price increases and provides downside protection when a stock slightly declines in price.

Subscribers to the Monthly Income Plan had exceptional returns from the monthly covered call trades.  We enter 4 monthly covered call trades on September 24 2012 for trades to expire on October 19 2012.  This is a total of 26 calendar days for these covered call trades.

The results included:

a 6.75% monthly return on the United Rentals, Inc. NYSE: URI covered call;

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6.57% on the USG Corporation NYSE: USG covered call;

5.09% on the Royal Caribbean Cruises NYSE:RCL covered call;

and a 5.4% return on the SanDisk Corporation NASDAQ: SNDK covered call.

This is an average return of 5.95% in one month on these 4 covered call trades.  For comparison purposes, this is an annualized return of 83.6%.

These trades significantly beat the S&P 500 and PBP Buy-Write for the last month.  For income investors, they made $595 for every $10,000 invested in these 4 combined covered call trades.

Click here to subscribe to the Monthly Income Plan to get new covered call trades each month for only $19.95 per month.

 

August 2012 Monthly Income Plan Update

As we approach the end of the August option expiration cycle, the Get Rich Monthly Income Plan had a great month for investors.

In January, we kicked off the perpetual covered call strategy. 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.  We will follow the progress of the perpetual covered calls each month throughout 2012 and I will email premium members with trading directions when an action is required.  Here are some of the results for 2012:

Perpetual Covered Call Returns:

Stock 1 – Oil Company has a YTD total return of 96.1% including dividends and special dividends.

Stock 2 – Drug Store Company with a YTD total return of 36.4% including dividends.

Stock 3 – Technology Company with a YTD total return of 25% including dividends.

We also provide a list of stocks for monthly covered calls.  Here we change the list each month based on investing in the right stock for monthly income.  For the August option cycle, this was a great month for our Monthly covered call trades.  We made monthly returns of 7.55% on UA, 4.33% on LVS, 4.0% on HP, 3.73% on VIAB and 3.58% on CERN.

We have added the covered put trades as an additional way to sell premium and to enter stock positions.  I frequently sell puts to enter a new stock position because (1) I get the stock at a lower price than it is trading at the market. (2) I get to produce income from the premium I receive when selling the puts.  If the stock is above the put strike price at expiration, I keep the premium and have the opportunity to sell more outs or just purchase the stock cheaper because I have the put premium to cover partial costs.  I have used this technique for several months on the same stock before I get the stock put to me.  This creates enough income to really lower the total cost of the stock.  Then, when the stock is put to me, I sell calls (covered) to earn more income until the stock is called away.  Then – rinse and repeat.

For August options, the covered put trades were great this month as all recommendations were winners.  Returns ranged from 2.2% to 3.93% in one month.

For investors wanting to create monthly income, the Get Rich Monthly Income Plan is right for you.  Click here to learn more.

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.

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.

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.

Covered Call Write on Agilent Technologies (A)

Below is the option strategy for a covered write on Agilent Technologies (A).  This will produce monthly investment income over a 30 day time period.

OPTION STRATEGY:

Look at the December 2011 39 covered call.  For each 100 shares of Agilent Technologies (A) stock you buy, sell one December 2011 39 covered call option for a 37.65 (39.85 – 2.20) debit or better.  That’s potentially a 3.6% assigned return in 30 days or comparable to a 43.8% annualized return.

TECHNICALS:

The technicals for A are bullish with a weak upward trend. The stock is under accumulation with support at 37.03. S&P rates this stock 4 STARS (out of five) – buy.

RISK:

For investors seeking more downside protection, buy the May 2012 37 PUT for $4.50.  Sell the put when you exit the covered call trade.  The PUT protection is optional and not required to place the covered call trade.

RESEARCH NOTES:
S&P maintains buy opinion on shares of Agilent (A).  Oct-Q adjusted EPS of $0.84 vs. $0.65 is $0.04 ahead of our estimate.  Sales rose 10%, slightly below our 11% forecast.  Electronic measurement gained 12%, Chemical Analysis increased 4%, and Life Sciences grew 9%.  We are encouraged by the solid growth in Life Sciences, but see continued uncertainty in the U.S. government and academic end-markets. Agilent (A) indicated surprisingly stable and improving European academic markets.  The company guides FY 12 (Oct.) sales of $6.85B-$7.15B and EPS of $3.00-$3.35, in line with our estimates.  We keep our 12-month target price at $48.
Covered call write on Agilient Tecnology

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Monthly Income Plan Newsletter

Signup below to receive a free copy of the Monthly Income Plan newsletter for October 2011.  This report contains a market update, list of monthly dividend payers, covered call trades, protective puts and calendar spreads.  Subscribe to Monthly Income Plan.

 


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Covered Call Recommendation on Humana (HUM)

Covered Call Recommendation on Humana (HUM)

STRATEGY:

Look at the October 2011 80 covered call.  For each 100 shares of Humana (HUM) stock you buy, sell one October 2011 80 covered call option for a 75.89 (78.19 – 2.30) debit or better.  This is potentially a 5.42% assigned return. The ex-date is 9/26/2011 for a $0,25 dividend per share which will increase the return.

Blanket Put:  If you are looking for a blanket put for protection, look to buy the Jan 2012 77.50 Put for $7.00.  You will sell the Blanket Put when the covered call position is closed.
Potential Risk: The technicals for HUM are bullish with a possible trend reversal. The stock is under accumulation with support at 76.35. S&P rates this stock 4 STARS (out of five) – buy.

S&P research notes:

S&P reiterates Buy opinion on shares of Humana (HUM) . HUM agrees to acquire MD Care, a California-based Medicare Advantage HMO with 15,000 members. Terms were undisclosed. HUM expects the transaction to close by year end. We see it benefiting modestly from improved economies of scale, as HUM already has 400,000 Medicare members in California. Nonetheless, we think it will improve its competitive position in the state. MD Care had ’10 revenue of $155M, but HUM does not expect the transaction to materially affect ’11 earnings guidance. Our EPS model is unaffected by the transaction until it occurs, and we keep our $90 target price.

Covered Call Recommendation on Covidien

STRATEGY: Covered Call Recommendation on COV

Look at the January 2012 47.50 covered call for an income investment. For each 100 shares of Covidien PLC (COV) stock you buy, sell one January 2012 47.50 covered call option for a 44.13 (48.43 – 4.30) debit or better. That’s potentially a 7.6% assigned return. Plus, COV is expected to pay one dividend during that period, which should boost the return higher. The ex-dividend date on this distribution is expected in late September.

 The technicals for COV are bearish with a strong downward trend. The stock is under accumulation with support at 48.05. S&P rates this stock 5 STARS (out of five) – strong buy.
 S&P reiterates Strong Buy opinion on shares of Covidien PLC (COV) . COV outlined its focus on innovation, product portfolio management and efficiencies, and we remain encouraged by its product launches and China expansion. We see 4.7% revenue growth in FY 12 (Sep.), vs. 11% in FY 11, mainly on the lapping of acquisitions. However, we view 10% EPS growth from $3.95 we see in FY 11 to $4.34 in FY 12 (both trimmed today by$0.01) as doable, assuming gross margin expansion outweighs headwind of FY 11’s extra week. We view cash flow as strong, providing financial flexibility, but trim our target price by $2to $64 on peer valuation compression.
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