The questions have been rolling in this week.
Last week I talked about
reliable income from a place you haven't
. It's simple, real and more importantly, a great source for
driving income on a monthly basis.
There are so many advantages to using this simple strategy to
buy stocks you want to own. Again, it's a safe and reliable way
to bring in income, but some investors simply use the strategy to
lower the cost basis of their stock. Either way, it's a strategy
that every investor should incorporate in their quest to grow
So why aren't more investors selling puts?
Quite simply, most "experts" in the financial media think this
kind of investment is too risky or complicated for the average
investor. And frankly, there's no money in it for brokers, money
managers or anyone else in the financial services industry. Once
you learn how to use this strategy, you'll begin to see the world
of finance differently. Instead of "paying" people to invest your
money, you are paid to invest.
The first key to selling puts safely and profitably is knowing
the real risks in owning a company's shares. We need to assure
ourselves the companies we sell puts on are fundamentally
For example, take
It's a stock that we feel comfortable owning for the long haul
mostly due to its unwavering quest to please shareholders. The
company continually buys back stock and pays a healthy dividend
The stock is currently trading around $35 - near a 5-year
In my opinion, the price is a little inflated. So I prefer to
Remember when I said we want to be paid to be investors? Well,
given our desire to own Altria at $33 - we can get paid. Think
about that: we can get PAID to agree to buy a stock at our
I don't want to get into the details in this short column, but
we can sell one put contract that gives us the right to buy 100
shares of Altria at $33 a share - and collect an immediate $32
for a 4.8% return in just over a month.
(I made a similar trade in GDX for my
High Yield Trader
subscribers last month and made more than 6% … at a time
the ETF price was plummeting.)
And no matter what happens, we get to keep that $32. If Altria
stays above $33 - the $32 we collected is ours.
But for the sake of understanding, we should examine the
alternative - Altria closing below $33 by option expiration.
In that case we'd keep the $32 and be forced to buy Altria
stock at $33 per share.
In this case, we'd actually own the stock for $32.68 per share
- that's the $33 strike price minus the $0.32 premium. That 7.07%
less than Altria's current market price.
The important thing to remember is that if the stock
trades below $33 by option expiration, you become a shareholder
just like everyone else … but at a discount
Plus you get the dividend of at least $176 per 100 shares
during the following year.
In essence, you'd receive $176 plus a minimum of $32 (in most
cases significantly more) on a $3,300 investment. This works out
to at least 6.3% on your money.
To me, this safe 6.3% return is superb given the current
yields on bonds and other "safe" investments. And my simplified
example doesn't assume that Altria will boost the dividend within
the next year.
One other thing to mention … had you purchased Altria stock, I
would recommend selling a set of calls against your new stock
position. This would boost the immediate income of the overall
trade ... but let's not jump too far ahead. I want to save this
, when I'll discuss all of this in detail.
I had to skip over some important details due to the
length of this daily letter. But if you're interested in
click here for full details