I have a few prices for you to look at. It's funny. People still come up to me and say, "Do people really come up to you?" Just joking for my family. That's an old Emo Phillips joke, I think. No, they ask for a hot stock tip. I say, "No, but I'll give you a hot stock strategy." And today's strategy is simply this---GET YOUR MONEY TO WORK FOR YOU. Get a group of assets that produce monthly income for you, so you can quit your job and spend more time with the grandkids, or travel and visit family.
In the stock market I'm talking about three good strategies for developing monthly income. One, Rolling Stocks. Two, Writing Covered Calls. Three, Bull Put Spreads. I like straight options and I would make that number four, but so few people make consistent money with call and put options. Look at some of Molly's trades in previous blogs.
So, the solid strategy, one that is the workhorse strategy for so many is Writing Covered Calls. Here are a few examples:
1) Bank of America (BAC). Earlier today (10/5) the stock was going for $5.52. You could buy 1,000 shares and wait. I like this as I think this is a good support level. However, if you want income, cash in your account, consider selling the November $6 calls for 52 cents. You would take in $520 cash now, and make another $480 if you get called out at $6. This is a six week trade.
2) RENN, RenRen, China's new facebook type company is going for $4.96. I think it's a bargain at this price. Check out the fundamentals yourself. Again, 1,000 shares would cost $4,960, or about $2,500 on margin. The $5 calls for October are 35 cents to sell. You would take in $350 cash now, and agree to sell it at $5, making a little more if you actually sell it. Either way, you get to keep the $350. Not bad for 2 1/2 weeks. This trade expires on October 21st. You can buy back this option later and sell out to October at that time. Oh, the November $5 calls are 60 cents now. That's $600 cash now.
3) American Airlines (AMR). The stock is $2.46. It's been beat up lately, and it has sold off, but at this price a lot of analysts are now recommending it. Don't just buy it , but do some research. The stock would cost $2,460 and the October $2.50 calls are 25 X 28 cents. That's $280 you'd take in and 4 more cents if you actually sell the stock. The November $2.50 calls are 41 cents to sell, or $410.
4) FAS, has been on a dip, along with the other stocks. It was at $9.62 to buy the stock. That's $9,620, or about $4,800 on margin. the October $9 calls are $1.61, or $1,610 cash. You'd have to give back $620 if you got called out. You'd still make about $1,000. The October $10 calls are going for $1.07 to sell. That's $1,070 cash now, and another $480 if you get called out. Look at the November calls. The $9s are $2.25, or $2,250 cash in. The $10 calls are going for $1.97, or $1,970 and you still make the extra $480 if you got called out. Two positions like this and the average American family can retire.
I've been following and trading Micron Technology (MU) and Advanced Micro Devices (AMD) for years. They seem to form a rolling pattern, though not perfect. Almost always they are a good candidate for covered call writing. Why? I'm glad you asked. For a stock to be a good candidate it needs to be solid, meaning making a profit and have some fluctuation, but not wild gyrations.
I also look for the 6% to 8% return, without margin. 10% and more is nice, but sometimes a really high option premium signals a volatile stock in the extreme. Pharmaceuticals are a case in point, especially when they are coming up on a new medicine approval. What I mean by 6% to 8% is this: Say a stock is around $7. The one month out options at a $7 strike are going for 50 to 70 cents, or 6% to 10% of the stock price. Think of this simply. If you buy or already own a stock at $7, and you sell an option against your position for 60 cents, you'd take in $600, if you owned 1,000 shares and sold 10 contracts.
This is a good cash return. Someone is willing to give you $600 cash right now---cash you can use for anything you like, including buying more stock---to tie up your position for a few weeks to a month. This is stock as an asset that you use to generate monthly income. If you think your stock may move up to $9 or more, you shouldn't encumber your position with a covered call. By selling the option we have reversed the process of traditional option trading. We have not purchased the right to buy the stock at a certain price, we have obligated ourselves to sell the stock at a certain price. We are covered in this obligation because we actually own the stock.
Let's look at a real example: MU. The stock closed at $4.96 today (10/6). If we purchased 1,000 shares we would spend $4,960, or about $2,500 if we used margin. Now we sell the October $5 call options, obligating ourselves to deliver the stock at $5 on or before the third Friday of the month, the 21st. The options are 43 X 45 cents. The 43 is the bid, the 45 is the ask. We sell at the bid, for these examples, though in real life we can try to get more with a limit order, say 52 cents. But again, in this format we have to use static numbers. Back to the 43 cents. That's $430 cash now that someone is will to give us to tie up our stock, and potentially buy it at $5, on or before the 21st. What could you do with an extra $430 now? If we sell this stock we'll make an extra 4 cents, or $40---almost enough to pay commissions. If we do not sell the stock we get to keep the stock to generate income another day, as in tomorrow; and we get to keep the $430 for our trouble, which was no trouble at all.
What if $2,500 generated $400 plus per month? Oh, and if you had $5,000 and lived a little on the wild side (read that margin), your $5,000 would have purchased 2,000 shares, and you would take in $860. Again, the business I like to find myself in is helping people live a better life. Call it retirement. Call it passive income. Call it freedom.
FYI. The $5 calls for November are 63 cents to sell, or $630. Rule of thumb: Take the money in the current month. The next month will be there . . . well, next month. Pretty cool huh? And we did this without double dipping---doing a second or third trade within one month, using the incredible buy-back.
FAS, RENN, EK, AMR also look good. Remember the way to get good at these strategies is to practice trade, and then practice trade some more.
Wade
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