One day, the dividend bubble will pop. It might not be
tomorrow, or next year - but when it happens, you probably don't
want to be heavily reliant on most of the heavily touted dividend
stocks you hear about today.
Though I recognize that dividend investing is a great long
term strategy, I'm not terribly interested in reaching for yield
And we have alternatives.
You can bring in steady income using a small portion of the
money that is just sitting stagnant in your account.
In fact, it's a simple and straight-forward concept and one
that I have been
teaching self-directed investors for years
Create Your Own Dividend
The answer: credit spreads. It's the #1 strategy used by
options professionals for a reason.
Credit spreads afford you the ability to create your own
dividend…a monthly paycheck. When you sell a credit spread you
collect cash (credit) up front while simultaneously transferring
risk to the buyer
Best of all, selling credit spreads allows you to create your
own income targets. And the sum of all of your so-called targets,
when set properly, gives you a targeted monthly income.
Let me explain using a recent investment in Apple (Nasdaq:
I talked about this trade in my latest
Over the last two months Apple rallied over 22%.
Will it continue its advance?
As an options trader and a self-directed investor I really
don't care. I only care about growing my portfolio through income
generating strategies like the one I use in my
So, how can we take advantage of the recent price action in
Look no further than the bear call spread - a type of credit
What is Bear Call Spread?
bear call spread
is a credit spread composed of a short call at a lower
strike and a long call at a higher strike. The nature of call
pricing structure tells us that the higher strike call we are
buying will cost less than the money collected from the sale of a
lower strike call. It is for this reason that this spread
involves a cash inflow or credit to the trader/investor.
The ideal condition is for the spread to expire worthless, thus
allowing you to keep the premium collected at the time of the
sale of the spread. In order for this to happen, the underlying
will have to close below the lower strike call option that you
The basic premise of the strategy is easy:
you choose the probability of the trade. Increasing the
probability of success will decrease your potential profits, but
will increase your likelihood of success.
So, with Apple recently surging to over $700 and into a very
overbought state I thought the stock was well overdue for a
pullback, at least temporarily.
Again, now that I have an assumption in place, let's move onto
my strategy of choice…the bear call spread.
With Apple trading at $690, I wanted to choose a short strike
for my bear call spread that met my risk/return objectives.
I prefer a win rate/probability of success in the 70%-95%
range. As such, I invested in the Oct12 750/755 bear call
I like to give myself a decent margin for error, which obviously
increases my probability of success. For example, the 750
strike allows for a $50 or 7.1% cushion to the upside.
The Oct12 AAPL 750/755 bear call spread (
check out my brief discussion of the trade
) met my expectations as it brought in a credit of approximately
$.62 or $62 per contract.
As a result:
- The max gain on the trade - 14.4%
- Probability of success - 86.6%
Apple would have to move above $750.62 for the trade to start
losing value. As long as the stock price stays below $750.62
through October options expiration the trade is successful.
Nine days later I was able to take off the trade for almost a
max gain. A 10%-12% in less than two weeks on a fairly
conservative trade…not bad.
Credit spreads are my favorite way to trade options, particularly
selling verticals. It's an extremely simple strategy to learn and
arguably the most powerful strategy in the professional options
traders' tool belt. And I can use credit spreads as often as I
As always, if you have questions, feel free to drop me a line
Editor and Chief Options Strategist
The Strike Price