TWO-STEPPING, Part 2

The blog I wrote yesterday has caused quite a stir. Thank you for your comments and questions. I honestly have enough to write 5 or 6 more blogs, and maybe this will be the start of a new book or study course. Your questions mean a lot to me, and they lead me along.

In the next few days I'll write about 1) the downside of a stock we choose to use for writing a covered call. More specifically, what we can do if the stock goes down in value; 2) Finding the right kind of stock; 3) Double-Dipping and extra monthly cash flow; 4) and other enhanced techniques for safety and generating even more income. It will be fun. Just because I listed all of this, please feel free to keep sending your questions.
I'm going to give several examples of stocks we looked at today. We'll buy some of these stocks and then sell out to the November expiration date call options, creating a covered call situation. These prices were as of about 12:30 PM, October 17th 2011. Later, as we move through these blogs, I'll bundle a group of stocks and use $20,000 as our cash invested. If you only have $2,000 then you start there. Even $300 extra per month can make a big difference.

Here we go: Bank of America (BAC, the ticker symbol) was $6.05 to buy. The Nov. $6 calls were going for 58 X 59 cents. Stop. We say that as 58 by 59 cents. The first number is the bid and the second number is the ask. Together, they are the bid and ask. If you wanted to buy the stock option at the asking or market price you would buy it for 59 cents.

ANOTHER DAY
I have to jump in here to tell you what just happened. Everything above was written yesterday. It's now the next day, Tuesday, Oct. 18th. We just had a class and divided the students up into 5 groups of 2 each. Each group started with $20,000 of "paper" money. I wanted them to go for the gusto. Me gusta le gusto! (A little Espanol and French awkwardly mixed together). Take the $20,000 on margin, making it $40,000 in buying-power and see how much they can make selling November options against these stock positions.
Here are the prices, as of the close today.
BAC $6.64 $6 c = .88 X .92
S (Sprint) $2.88 $3 c = ..26 X .27
RENN $5.65 $6 c = .45 X .50
EK (Eastman Kodak) $1.31 $1.50 c = .26 X .30
MU (Micron Technology) $5.77 $6 c = .42 X .44
FAS $12.83 $13 c = $1.46 X $1.50 (WOW)
YHOO $15.47 $16 c = $1.10 X $1.15

Okay, here's how it works. I'll give you an example and then challenge you to do some deals on paper. That's one of the great things about writing covered calls, you can paper trade, and you can measure you cash returns before you ever use real money. "Perfect Practice Makes Perfect."

Let's say you buy 2,000 shares of EK. 2,000 times $1.31 is $2,620. Now you sell 20 option contracts of the November $1.50 calls, giving someone the right to buy 2,000 shares of your stock at $1.50. Each contract represents 100 shares. They're going for 26 cents.  2,000 times .26 is $520. This is money you get into your account in one day. That's a nice cash income based on your $2,620, or $1,310 on margin.
The formula is simple: #1 Buy stock, as many shares as you like. Try to always buy in 100 share lots as the options are 100 shares for one contract. #2 Sell Option. Choose a strike price you like. With this one you could have sold the $1 calls for .46, and taken in $920 (.46 X 2,000=$920). But then you would have to give back the .31 cents if you got called out at $1. That would be $610 from the $920. This is okay, but I like selling slightly out-of-the money options. This means the strike price above the stock price.

Now you do one. Pick a stock. Multiply by the number of shares. Divide by two, for the margin amount. Yes, margin is risky, but this was a group of wild and crazy guys, young and daring, so why not be a little risky and risque. Now sell the options and the cash will be in your account tomorrow. Do you like it?

Here's what they came up with. One group used the whole $40,000 and made $4,450 and a little more if they got called out.

The next group made $4,750, but $4,450 if called out of one of the stocks they used. Two other groups were about the same. The last group, a couple of guys from Hawaii made $7,277. Hint: they bought 15,200 shares of EK and sold 152 contracts of the $1.50 calls for .26 each. They bought 3,500 shares of RENN and sold the $5 call, taking in a lot of money, but might have the need to give some back if called out. They're counting on doing a buy-back as time goes on. More on the buy-back in a future blog. Do the math yourself. You will soon have one of those AHAAA moments. These numbers and the buy-back create an awesome power strategy.

Look once more at their results. I'll ask the question again: Does this pique your interest? Does making over $4,000 a month on $20,000 get your attention? What if you only have $4,000 to invest, how does $800 a month extra sound?
These are real numbers. Check them out yourself. Can this strategy lift you out of the doldrums?