I can't believe more people aren't taking advantage of
With bond yields near record lows and traditional income
securities like savings accounts and certificates of deposit
earning next to nothing, we're regularly finding "instant yields"
as high as 9.2%... 13.7%... and even some as much as 19.8%.
#-ad_banner-#For instance, right now our research is showing
an opportunity to collect a $1,575 cash payment from Visa (NYSE:
) for a 7.8% instant yield... a $980 cash payment from Starbucks
) for a 12.8% instant yield... and we've even identified an
opportunity to earn a $2,070 payment from International Business
) for a 9.6% instant yield.
And the best part thing about these "instant yields" is that
there's nothing complicated about them. To collect, you don't
have to monitor your brokerage statement daily. Nor do you need a
million-dollar bank account and access to a high-powered
In fact, all you really need is 100 shares of a single stock
-- and the willingness to sell those shares for a profit.
I'm talking, as you might have guessed, about selling
If you read
this recent issue of
, then you know that a covered call strategy involves selling
call options on stocks that you already own. In exchange for
selling the options, you receive upfront payments known as
premiums. These premiums can range from a few hundred dollars to
$10,000 or more, depending on the size of your investment.
In exchange for paying the premium, the buyer now has the
"option" to buy that stock from you for a specific price known as
the option's strike price. Whether or not he exercises that
option depends on the stock's price the day the option
If, on that day, the stock is trading above the option's
strike price, you'll be required to sell those shares -- usually
for a profit -- to the option buyer. If the stock is trading
below the option's strike price, then the option expires
worthless and you keep the premium with no further action
required on your part.
Think about that for second.
I don't know anyone who buys a stock without wanting to sell
it eventually. Even long-term growth investors usually have a
price target for most of their underlying holdings.
So why not get paid while you wait for your stocks to get
That's essentially what covered calls allow you to do. By
selling covered calls, you're generating a constant income stream
while waiting for your stock holdings to appreciate in value.
Since you already own the stocks you're writing the options
on, and you're willing to sell those stocks when they reach your
target price, employing this strategy adds zero additional
But at this point you're probably wondering: What if the stock
declines in value?
In that scenario, selling covered calls can only help you.
Remember, to sell covered calls, you have to actually own the
stock you're writing the option on. So regardless of whether you
use this strategy, your portfolio is still going to take a hit
from the declining share price.
But the beauty of covered calls is that they let you offset
some of the damage. That's because for every premium you receive,
you simultaneously lower your cost basis in that investment.
To see how it works, consider International Business Machines
Last year, the $206 billion IT services company was one of 39
stocks in the S&P 500 to finish 2013 in the red. All told,
IBM fell from $192 a share in January to below $187 by December
31 -- a 3.1% loss on the year.
As a result of that lackluster performance, I'm willing to bet
most IBM shareholders lost money on the stock during the past 12
But for people selling covered calls, IBM wasn't nearly as
much of a disappointment. In fact, chances are those investors
actually made money on the stock last year.
That's because for most of 2013, options investors were able
to generate anywhere from $200 to $400 every two months by
selling covered calls on IBM.
Just how much they received depends on both the length of the
contract (how long until the option expires) and the value of the
For example, right now IBM trades near $190 a share -- very
close to where it sat at the beginning of 2013. In order to
generate what we call "instant income," investors could sell
March $195 calls
on IBM for $3.45 a share. Since each contract controls 100
shares, the trade would generate approximately $345 in "instant
income." As long as IBM isn't trading above $195 the day the
option expires, you'll get to retain your shares and keep the
premium you collected as pure profit.
Since in this example the trade lasts roughly two months, you
could repeat this process six different times over the course of
a single year. Assuming you get roughly $3.45 every time you sell
a call, you would essentially lower your cost basis by $20.70
($3.45 x 6) for each share of IBM you own during that period.
So that means IBM shareholders who used a similar strategy in
2013 could have had a cost basis closer to $169.30 ($190 -
$20.70) by the time the year was all said and done. So instead of
losing 3% like everyone else, covered call investors could have
earned as much as 9.6% by investing in IBM. And that's before
even considering IBM's dividend, which currently pays another 2%
That's the power of this strategy. Regardless of what your
portfolio looks like, you can dramatically juice your returns by
selling covered calls. All you need is at least one stock you're
willing to sell at a profit if it jumps higher.
What's more, while this strategy works great for big blue-chip
companies like IBM, you can earn even more income -- and get even
higher returns -- if you're willing to use this strategy on
companies that aren't as well known.
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