TWO-STEPPING AND DOUBLE-DIPPING
I'll bet all of the people who have read my books or been to my seminars are wondering why in all of these blogs I haven't mentioned my cabdriver experiences. After all I've told the story repeatedly, emphasing that I learned the most important financial lesson of my life driving a taxi. Well, there is no reason to wait any longer. The lesson I've learned and shared is this: "The money is in the meter drop." Simply put, without telling the whole story, is that I made more money taking all of the short runs in my cab driving days rather than waiting for the big run to Sea-Tac Airport. Every time someone got in the cab, I'd drop the meter and it cost them $1.50 to start. I made a lot more than most of the cabdrivers by going for more short runs.
In real estate I employed this strategy by rapidly buying, fixing and selling houses. In the stock market, it is the same. I don't buy a stock at $6 and hope it goes to $60 or $600. I'm trying to make short, smaller profits on a repeatable basis. We live in a monthly cash flow (pay the bills) society. I was often introduced as Wade 'Cash-Flow' Cook.
SELLING THE UPSIDE
I love writing covered calls. It is a cash flow system, using an asset to make monthly income. In Part 5 I'll answer most of the who, what, when, where, why, and how questions. Let me show you here how to make extra income. Double dipping is a procedure that is learnable and repeatable. It is easy to understand and easier to implement.
When we write a covered call, we buy a stock and then sell a call option (usually one month out) and generate immediate cash into our account. We buy a fixed price asset and sell a fluffy option. We can pretty easily get 10% cash returns each month. I'll show you several actual examples at the end of this section.
One drawback when we write covered calls is that we give up the upside of the stock. It is funny. When many people hear about covered call writing, I guess because they can't believe so much money can be made and therefore have to try to find fault with it, ask, "What if the stock goes down?" I answered that in Part 3 of this series. The question they should be asking is: "What if the stock goes up?" There's a lot of pessimism out and about. No one seems to expect stocks to go up anymore.
Here's what I mean. USU (an actual stock) was at $2.10. The $2 call option was 35 cents. If you own the stock and give someone the right to buy the stock at $2, you do not participate in anything above $2. You got paid $350 (assuming you own 1,000 shares of the stock, $2,100). If the stock goes to $3, well, you have limited your sale price to $2. In fact, you would have to give back 10 cents, or $100 of the $350 option premium, netting only $250 for one month. I say that tongue in cheek because right here we have a 10% cash return for one month. If you really think a stock is going to fly don't write a covered call against it. When we first found this stock (about 12 days ago) the stock was at $2.04 and the $2 call was going for .57 cents, Time value disappears. I mention this to teach a lesson: Sell time value.
THE ALL IMPORTANT QUESTION
There is a question that you should use all of the time when writing covered calls. It is this: "DO I WANT TO SELL THE STOCK?" Let me show you how important this is. Let's use the above example to explain this process. Keep in mind, that I'm really big into quality questions. You will need to make some decisions, like this: Should I sell the $2 calls or the $2.50s? Should I wait to sell the option, hoping the stock will go up in the meantime, or just sell it now---selling the extra time? Should I sell the option for this month or for next month? There are a few others.
Later when you to buy-back the option, you will use the same question in making that decision, and then on the same phone call with your broker, you will use the question again to make more decisions. Yes, it's all about cash flow, therefore the question and answer for Jim will be different than that for Sally. They each have needs, they each have skills, they each have more or less time to devote to the process.
If you really want to sell the stock, then sell the lower strike price. If you want to keep the stock sell the higher strike price, and/or be prepared to buy back the option on the next dip. It depends on you and how much you want to make.
DOUBLE DIPPING
If you want to learn more about the basics, I wrote a whole book about this: STOCK MARKET MONEY MACHINE.This is a single topic book about writing covered calls. Double Dipping is a big part of this process if you want to make a lot more money. Like any other methodology there are good, better, best ways of proceeding. Over the years I've worked hard on these enhanced formulas.
It starts with a desire to make money: PASSION, PRECISION, PERSISTENCE, then the PROFITS. You will never get to the profits without the other three. In fact, unless you have a passion for something you will never gain the precision, the exact details, you need to succeed.
Here is how to double dip. You have sold the option. You called your broker and said, "I want to put in an order to sell ten contracts of the November $2 call option for .35 cents. The order goes through at .35 cents. You take in $350. It hits your account the next day. Options trade in one day, stocks in three. You now place an order to buy back the same option. If the stock dips or time expires the option will reduce in price.
When you sold the option you were considered in a short position. On your activity statement for your account it will read Short (-) 10 contracts Nov $2 call. Sometimes it will say short, sometimes there will be a (-) sign. You have opened a position on your stock. It is like a lien on real estate. You are covered because if you are called out, you own the stock and can deliver it. If that is done, almost always on the expiration date, you will see it taken out of your account on Monday. Your account will say, "Account Assigned." The stock will be electronically taken out of your account. The money for selling the stock will be in your account on Thursday. I call this being called out, or selling the stock.
What if you don't want to get called out, even though the stock is above $2? You don't have to be. You can end the open position by closing it. You sold ten contracts, now you buy ten contracts. That will be a plus (+) to the computer, and the short position will end. It's a wash. You have bought back the call position. You have no more obligation to deliver the stock. You're free and clear and good to go. You have recaptured the upside of the stock. You can sell the stock; wait for it to go up; sell another covered call, say the next lower strike price; immediately sell the call for next month---selling more time and pocketing more cash. The choices are yours. Remember it starts over again with the question: Do I Want To Sell The Stock?
This means you have time to think about the trade You can watch this time value and get out of the position, if you choose to. Let's look at what might happen if the stock is at $2.20 and the option is .15 X .20 cents. No time value in the premium so you might get called out. Will you get called out for sure? Yep. If the stock is above $2 you will get called out.
ASK THE QUESTION
Let's use the above example to determine what to do. If we can wrestle with the choices here on paper, you will be able to make better decisions. Should you leave the position alone and get called out, or buy back the option and keep the stock to fight another day? Start by asking the all-important question: Do I want to get called out? How can you make the right choice? There is no right or wrong choice, only ways to make more money---with this same stock or another one.
Here's how simple it is. If it's expiration week, this month's time value is pretty much gone, so inquire about the next month's options. The stock is up from $2.10 to $2.15. You sold this months option for .35 cents. Next months $2 call option can be sold for .45 cents. That would represent $450. You like that number. Now, here's what you do. You buy back the current month option for 15 cents, or $150. Hold it, you ask, "that's 150 smackaroos." Yes, but on the same phone call you take in $450, netting a new $300. So, calculate it out. Income $350, outgo $150, more income $450. You're up $650, and you repeat this month in and month out.
Do you realize you could have figured all this out before you made the decision? The numbers talk to you. And think again, this is all based on $2,100, or $1,050 on margin. I like percentages sometimes, but I like to count the cash much more. A few positions like this and you can quit your job.
ROLLING COVERED CALLS
I have taught this strategy for about 20 years, doing thousands of trades myself, or corporately. As I traveled a new situation arose. My students were doing this two and three times a month. They called it rolling covered calls. Let me explain. Using this same example, they would sell the call for 35 cents, then a few days later, buy the option back on a dip in price of the stock. Then after the weekend, on the next rise in the stock price, they would sell the same option again, or maybe even sell the next lower strike price. More cash now. Then they would buy back the option again by the end of the next week, and sell it again a few days later. They were double-dipping, even triple-dipping. This requires a stock that is moving up and down.
I got tired of hearing of their successes. Again, tongue in cheek, because as an educator, I loved my students out-performing me. I've always been a better coach than player. But my competitive nature drove me to try harder. I set out to do it myself three times, and one month I did it five times on Qualcom (QCOM). I bought the stock at $24 and did covered calls all the way up to where the stock hit $38. This is the month I tried to triple-dip. I did it five times. Yes, that's FIVE. I sold the $40 call, then bought it back, then again and again. It was awesome. I made about $7,000 in one month. I also did it five times one August on Netflix (NFLX). I have tried several more times, but have only been able to do it two and three times a month. It's a lot of work. Oh, the reward? It's worth it, and the fun of doing so makes it like DoubleMint gum.
In all of covered call writing I look for a stock that moves up and down 50 cents to $1 every few days on cheaper stocks, and $1 to $2 every few days on more expensive stocks. Keep checking our site, we find them all of the time. This is working smarter, not harder.
MORE DEALS
I've decided to extend this blog topic. There is so much more good information to share. Useful knowledge, or what I call power strategies, let you zoom through the learning curve and help you make more money. But before I go, I promised that I'd share more deals. These were as of two weeks ago, before the October expiration date. I'll include October and November prices so you can ask the all- important question: Do I want to sell the stock?
We sell at the first number, or the bid, unless you want to place a limit order for more money. Note that you may not get it and might have to come back in later and take whatever you can get.
Micron Technology (MU). $4.91. The Oct. $5 call is .43 X .45. The Nov. $5 calls are .63 X .65. You would take in $430 on 1,000 shares of stock for October. Also, you'd make another .09 cents, or $90 if called out. If the stock stays here, that nice premium will disappear. You would take in more by selling the November's's, but the rule of thumb is this: Take what's on the table now. Nov. will be there after the Oct. expiration date.
FAS, an ETF. $11.50. The October $11 calls are .65 X .75. The $12s are .90 X .93. The November $11s are $2.21 X $2.26. The November $12s are $1.60 X $1.70. These are all great, and this stock is volatile enough to double- and triple-dip.
There are too many more to list here. You've heard "knowledge is power." Well, not so fast, at first knowledge is just potential. It becomes powerful with its wise application. Now on to Part 5. There we'll ask and answer more fully the question: Why do we buy back the option?
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