My favorite way to generate income just got even better.
Back in April, I started telling readers about a way to
increase their income from investments they currently own.
At the time, I believed it was possible to more than double
the amount of income you could receive from a dividend paying
company using a little-understood financial transaction.
Since April, this opportunity has only become more profitable.
Today it's possible to triple your regular dividend payment on
stocks you own - and I believe the only thing stopping most
people from using this income secret is - again - a lack of
To help you understand how this secret works, I'm going to put
it in straightforward terms. It might seem boring and ordinary
when I explain it this way, but remember:
this secret can help you immediately to triple the amount
of income you receive from your dividend stocks.
This secret involves a form of insurance. (Yeah I know
insurance is boring - please bear with me!)
You may be aware of how Warren Buffett was able to vastly
outperform the stock market over the long term. Simply put, he
bought insurance companies which gave him access to huge amounts
of cash in hand (the float) - and he invested the bulk of it in
the world's best businesses.
But you don't need to buy a whole insurance company to take
advantage of the amount of cash generated by insurance.
Almost every stock on a major exchange has a built-in insurance
market. And like "regular" insurance, it's much more profitable
to be a seller.
Just like when you insure your home, it's also possible to buy
insurance on your stock positions. And - again - just like
regular insurance, it's hugely profitable to be the seller of
I'm talking about options.
a put option, you're acting like the insurance company. You're
agreeing to buy someone else's shares of a particular stock for a
set price, under certain conditions, for a limited period of
In the case of your house, you'd exercise your policy in a
disaster … say when a fire or catastrophic weather destroys your
home. In the case of a put option, the holder would exercise his
right to sell us his stock if the market value of his shares
falls below the price we agreed to pay.
When you sell a put option, the trade works one of two ways. You
either collect the entire premium without any obligation … or you
end up buying shares at a discount. Considering the latter
it's important to sell puts only on companies you want
Let's walk through an actual options investment I told my readers
On April 25, 2013, I sold June $29 puts on Microsoft. At the
time, shares of Microsoft were trading for $31.50.
In this example, $29 is the strike price. As long as shares of
Microsoft traded above $29 by the expiration date (in this case,
June 21, 2013), the option would expire worthless and we would
get to keep the entire premium with no obligation to buy the
When the trade was initiated, the option premium collected for
selling those Microsoft puts was $0.40. Since an option contract
covers 100 shares, we immediately collected $40 for every
On June 21, 2013, the Microsoft options "expired worthless"
because Microsoft shares sold for $33.50 - well above the $29
strike price. We
got to keep
the entire premium for a 6.9% return on margin.
That word "margin" is important. When you sell put options, your
brokerage requires you to set aside 20% of your potential
obligation. If I sold one option contract, I would be potentially
responsible for buying 100 shares at $29 (or $2,900). In this
case, I would have to deposit $580 (20% of $2,900).
Because I collected $40 in options premium and only had to
deposit $580, I made roughly 7% on the investment in about 45
days. That's a 56% annualized return.
I encourage you to read and re-read today's
article on selling puts
. And for more information, I've made my recent webinar on
options selling available in video form.
Click here to watch it now
Once you understand how to sell puts - and how profitable and
safe this strategy is - you'll have a hard time doing anything
else in the market.
Editor and Chief Options Strategist
The Strike Price