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Selling Puts for Monthly Income

When you buy an option, you are hoping for a move in the stock based on a chart or event or your brother-in-law’s advice (bad move there).  Hopefully, you watch the option move up and then — when greed, fear or satisfaction set in — you sell and make a profit.  Or you watch it go down and either have an automatic stop loss in to sell it when it hits a certain level or, like most traders, you keep your fingers crossed and hope for the best … until the pain of losing on paper is greater than the fear of losing real money and you sell at a loss.

In a recent survey, results showed three out of four options traders still trade this way.  Accordingly, the same survey showed that three out of four options expired without being exercised or with any value.   And yet, the traders who took the “sell” side of the trade put money in their pocket on Day One of their trades, every single time.

Selling is a low-risk option strategy and a low-risk way to generate high monthly income and a great entry point to purchase stock at a lower price.

Here are several things to consider:

When you sell an option, you are collecting the cash up-front.  You are already ahead.

When you sell an option, you are transferring risk to the buyer.  Yes, when you sell options, you assume some risk but not to your capital.

This cash you collect upfront gives you the ability to manage the position – you have cash in hand to “close” or buy back the put or call, at a profit or loss, without using any or a good deal more capital.  This enables you to conserve capital, the basis for regular monthly income.

And accepting cash enables you to create targets for your positions.   The sum of these targets, when set properly, gives you a target income for the month … and that is what this is all about.

And selling puts let’s you decide the entry price when buying stock.  For example, you can sell a put to purchase a stock that you will sell covered calls against when it is put to you.  Then, you sell monthly calls until the stock is called away.  Then, back to selling monthly puts to re-enter the stock.  Rinse and repeat!  Over and over in the stocks that you want to generate monthly income.

Selling puts is actually a bullish tool.  The advantage to selling puts over buying calls is evident in the math:  The odds of winning are significantly increased.  Many professional traders use the short put strategy to buy stocks at prices they want.  Nobody wants to pay the highest prices to own shares, but when the stocks pull back – and stocks always pull back – the market helps you to get in at a better price.

But what if you don’t want to buy the stock?  Don’t sell puts on stocks you wouldn’t want in your portfolio.  You will get taken out of the trade if the buyer wants to exercise their rights (to “put” stock to you at the option’s strike price), and those are the kind of stocks you probably want to own!

This is always the risk with short puts, but it’s hard to call it a “downside” when you end up owning a good stock at a great price.  Besides, even if you are assigned to take possession of the shares, you can always sell them on the open market.  In fact, you can often get out for a better price and, thus, a profit … and repeat the strategy, if you choose.   Better yet, if the stock goes up and your put gets assigned, just sell a covered call against the shares and you’ve just established a new position in your portfolio — and another way to profit!

We are focused on generating consistent monthly income by selling options for premium using low risk strategies. You can get FREE trades at getrichinvestments.com

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How Put Selling Creates Monthly Income

Why would an investor sell put options instead of just buying the stock? You already know my response to this question – to create monthly income. There are several reasons investors should include put writing as a portion of their investment portfolio. Here is my list:

First and foremost is to create income. In this case, we are looking to collect the cash premium from selling the put option and not necessarily purchase the stock. This concepts is very important to better understand. My initial objective is capturing the premium but I realize in some cases the stock will be put to me. This is why I only sell puts on a select list of stocks I am willing to own if put to me. I like to focus on world class stocks that have stable earnings, strong balance sheets, pay growing dividends and trade within a low beta range in the market. This is part of my success using this strategy as I can collect dividends and sell covered calls for more income if the stock is put to me.

Secondly, I can purchase the stock at a lower price or discount to its current market price. The cash premium I collect from selling the put option reduces the capital outlay to enter or purchase the stock. I have experienced periods where I would sell monthly puts on a stock for 6 to 9 months before the stock was put to me. The amount of premiums added together made the entry price of stock significantly below the market price. For example, assume I average premiums of $100 over 6 months of monthly put writing which sums to $600. I have just lowered the purchase price of the stock by $600 – this is buying stocks at a discount.

Lastly, I use put selling to create my favorite income strategy – the Put-Call-Dividend (PCD) Income Strategy. This is simple selling puts each month on a select stock to collect monthly income. If the stock gets put to me, then I sell covered call options for more income while also collecting dividends paid by the stock. I sell call options for premium each month until the stock is called away from me. Then, I will start selling puts against the stock again. This strategy is exactly why I only sell puts on stocks I want to own – world class, strong dividend stocks.

This is the best income strategy I use in today’s market. In the October expiration cycle, our subscribers made 1.6% for the month by selling put options. For the past 3 months, monthly returns range from 1.5% to 3.1%.  How would you like to an extra $500, $1,000, $2,000 or more in income each month? Learn how to create monthly income by joining our investment newsletter.

 

How to Develop Multiple Streams of Income

To achieve financial independence, you must create a level of income to cover the lifestyle you desire. There are many ways to accomplish an income to fund your life experiences. Many work during their life to save money for this purpose. Some are entrepreneurs that start businesses usually with hired managers to carry the workload to create their income. Others invest in passive investments such as rental housing. Here is a look at investing strategies to increase your earnings and create multiple streams of income.

In author Thomas C. Corley’s five-year study of self-made millionaires he found that many of them develop multiple streams of income: 65% had three streams, 45% had four streams, and 29% had five or more streams.

“Three streams of income seems to be the magic number for the self-made millionaires in my Rich Habits study, but the more income streams you can create in life, the more secure will your financial house be,” he writes.

I apply Corley’s thinking to my investment portfolio by identifying several streams of income. One passive income stream is collecting growing dividends from world class stocks. These stocks have a strong financial position, competitive market position, known brand and growing dividend history. I also invest in closed-end funds that pay monthly dividends. This create a diversification opportunity as I can add fixed income, preferred stocks and other types of investments. Lastly and probably more important, I sell options for monthly premium income. This includes selling cash-secured puts and covered calls. I love this strategy and have created a consistent, growing stream of income.

Join me in creating multiple streams of incomes to live the life you desire.

How to Create a Better Lifestyle

Warren Buffet has always discussed the concept of Mr. Market. This is an idea around each trading day Mr. Market offers you the price to purchase a stock in the stock market. As an investor, you must decide if you want to but the stock at this market price. Is the stock overpriced, undervalued or will the market crash in the coming days? As investors, we can’t predict the future direction of stock markets. And if anyone tells you they can, then run away from them. To get around predicting the stock market, I sell puts on stocks to generate monthly income and I usually win regardless of what the market does in the coming weeks.

When we sell a put option, we are selling someone the right, but not the obligation, to sell shares of the underlying stock to us at a price that we select called the strike price on or before a date that we select called the expiration date. In return for undertaking this obligation, we are paid a certain amount of cash called the premium that the market determines.

Should the put buyer decide to exercise that option by selling his shares to us on or before its expiration date, we are obligated to buy those shares at the strike price. To cash-secure this transaction potential, we deposited the appropriate amount of cash into our brokerage accounts to purchase those shares at the strike price minus the cash premium received.

How often does a put get exercised? This is variable but most research indicates about 80% of options expire worthless or do not get exercised. When a put option expires worthless, the investor keeps the cash premium as their return. Put writers or sellers continue to sell put each month to create and capture the cash premiums. This is the monthly income to supplement your lifestyle.

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The Secret to Great Investment Returns

People ask me all the time what is the real secret to great investing returns.  They have lost faith in the talking heads on TV who are selling their latest investments hyped as the place to be in today’s market.  Often times these investments only separate the investor from their money. I have a proven strategy that is more rational so any investor can generate income by investing in great companies. My premise is cash doesn’t lie so when you have it in hand (or in your investing account), you know you have made money.  Probably the two most important attributes to making money on a stock investment is (1) buying a great business model; and (2) buying at the right price. I constantly see investors buying a great business but at a price too high to ever generate a return.

I have this thought leadership built into my investing strategy. One, I only buy great blue-chip stocks that have validated profit margins and competitive advantages. Many refer to these stocks as market dominators because they have well recognized brands such as Walmart, Intel and others. Two, I look to invest in these great companies at the right price. My research will point me to these stocks trading below fair value. These are the companies that will give us market beating returns with lower than average risk.

We further lower the purchase price by selling puts on the great stocks we want to own. Each month or so, we will sell a put options at the money to collect premium income. This premium income lowers the purchase price with each sell until the stock gets put to us. For example, selling an option put for $1.00 per contract in 3 consecutive months gives the investor $3.00 or $300 in cash. If the stock is trading at $40 per share, the put selling drops the investors cost to $37 per share ($40 – $3 = $37) In the meantime, the investor is earning an average of 1-3% each month in income.

This is the power of this strategy – creating income streams while buying great businesses at a discount price.

Learn more here: Monthly Income Newsletter

 

Monthly Income Portfolio – July Update

July Results - Click to enlarge

In the past, we have been expressing the view the equity markets were oversold and a rebound was likely to occur at any time.  Last week’s oversized bounce was probably due to two factors, the parliamentary vote in Greece forestalling a near term default event and the end of QE2 with the resulting bubble in the Treasury market that began deflating.  For the time being rising interest rates are reflecting a return to the “risk-on” condition.

As we caught an upturn in the market, all of our positions are deep in profits. We have captured 90% or more of the total profits in most of our put positions. Even though we are 10 days from expiration of July options, we will take profits on all five positions today. This will give us a total of $3,992.50 profit in less than one month. This is a return of 3.99% on the starting balance of $100,000. These positions were initated on June 27 so we are only 6 trading days (8 total days) into the trade. This is an annualized return of 182% which is hard to beat in most portfolios. Here is the positions today before selling them (see July Results).

Since July options expire on July 16, we will add new positions for August expiration.  We closed all July put positions so we did not get any stock put to us.  The new positions are shown in the chart below (see new positions).  We will write more puts on Under Armour (UA), Cummings (CMI) and Coach (COH): all with new strike prices in August 2011.  We will add two new stocks with put writes: MetroPCS Communications (PCS) and Celgene (CELG).    This creates a total of $6,190 in premiums received from selling August puts from these new positions (see the breakdown by position in chart).   This is a return of 5.98% based on the portfolio value of $103, 579.37 shown in chart.   In addition we invested $3,978 of our profits in 650 shares of Alpine Total Dynamic Dividend Fund (AOD) which pays a monthly dividend and has a yield of 10.7%.  We will continue to invest profits in monthly dividend payers.

New Positions - Click to enlarge

Under Armour, Inc. (UA) is engaged in the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The Company’s products are sold worldwide and are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as consumers with active lifestyles. Its products are offered in over 23,000 retail stores worldwide. Most of its products are sold in North America. The Company’s trademarks include UNDER ARMOUR, HEATGEAR, COLDGEAR, ALLSEASONGEAR and the Under Armour UA Logo. The Company’s product offerings consist of apparel, footwear and accessories for men, women and youth.
Cummins Inc. (CMI) designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls and air handling systems. The Company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It has four segments: Engine, Power Generation, Components and Distribution. It serves its customers through a network of more than 600 company owned and independent distributor locations and more than 6,000 dealer locations in more than 190 countries and territories. In November 2010, it purchased a majority interest in a previously independent North American distributorship. On January 4, 2010, it acquired the 70% interest in Cummins Western Canada (CWC). In April 2011, the Company sold its exhaust business to Global Tube.
Coach, Inc. (COH) is a marketer of fine accessories and gifts for women and men. Coach’s product offerings include handbags, women’s and men’s accessories, footwear, business cases, jewelry, wearables, sunwear, travel bags, fragrance and watches. Coach operates in two business segments: Direct-to-Consumer and Indirect. During the fiscal year ended July 3, 2010, the Company introduced Poppy, which offers a variety of silhouettes. It also introduced additional lifestyle collections. The accessories include women’s and men’s small leather goods, novelty accessories and women’s and men’s belts. The Company’s footwear is distributed through select Coach retail stores, coach.com and over 950 United States department stores. The wearables category consists of jackets, sweaters, gloves, hats and scarves, including both cold weather and fashion. During fiscal 2010, Estee Lauder Companies Inc., through its subsidiary, Aramis Inc., became Coach’s fragrance licensee.
MetroPCS Communications, Inc. (PCS) is a wireless telecommunications provider in the United States measured by the number of subscribers served. The Company offers wireless broadband mobile services under the MetroPCS brand in selected metropolitan areas in the United States. The Company provides a variety of wireless communications services to its subscribers on a no long-term contract, paid-in-advance basis. As of December 31, 2010, the Company had approximately 8.1 million subscribers. Its products and services include voice services, data services, custom calling features and advanced handsets. At December 31, 2010, the Company had thirteen operating segments based on geographic regions within the United States: Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco and Tampa/Sarasota.
Celgene Corporation (CELG) is a global integrated biopharmaceutical company. The Company is primarily engaged in the discovery, development and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases, such as immunomodulation and intracellular signaling pathways in hematology, oncology and immune-inflammatory diseases. Its primary commercial-stage products include REVLIMID, VIDAZA, THALOMID (inclusive of Thalidomide Celgene and Thalidomide Pharmion), ABRAXANE and ISTODAX. Other sources of revenue include sales of FOCALIN to Novartis Pharma AG (Novartis), which is a licensing agreement with Novartis, which entitles it to royalties on FOCALIN XR and the entire RITALIN family of drugs. On January 15, 2010, it acquired Gloucester Pharmaceuticals, Inc. (Gloucester), which is a privately held pharmaceutical company. On October 15, 2010, the Company acquired Abraxis BioScience, Inc. (Abraxis).
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