Tuesday, January 13, 2009
"Are there any newcomers in the room who would like to share?" asked the lady at the podium as her eyes canvassed the room.
I raised my hand, stood up, and walked sheepishly toward the microphone.
"Good afternoon, everyone," I began. "My name is Jeff and I'm a shareholder."
"Hi, Jeff," the crowd responded.
This was my fist AA meeting. Actually, it wasn't so much a meeting as it was an earnings conference call. And it wasn't AA in the traditional sense. It was Alcoa Aluminum (AA).
Alcoa announced a loss of $1.15 per share for the fourth quarter yesterday. Analysts expected the loss to be $0.05 per share. My heart stopped when I heard the news.
You see, I recommended shares of AA to my Advanced Income subscribers back in December at $9 per share. And for a moment, I worried the earnings announcement would hurt the stock and send the price back down below where we purchased it.
Of course, we have a bit of a cushion. We bought the stock at $9 and immediately sold covered calls to give someone else the right to buy the stock from us at $10 per share by this coming Friday. We collected $1 for selling that option.
So we were into the stock at $8 per share. And we were sitting on a pretty good one-month gain of 25% as Alcoa went into its earnings announcement.
When I made the recommendation, Alcoa, which has been around for 120 years, traded at just five times earnings and offered a dividend higher than 6%. So unless we're on the verge of financial Armageddon, something I won't dismiss outright, then AA was the perfect "value" play.
Our options expire this Friday. If AA is trading above $10 per share, then we'll be obligated to sell Alcoa at $10 and we'll pocket a 25% return in just over five weeks. If AA is trading below $10, then we'll get to keep the stock. The options will expire worthless. And we'll have an opportunity to sell covered calls for February and pocket another 4% return.
Either way, this was a terrific low-risk trade.
I've said it before, and I'll say it again... The current market environment is perfect for investors who want to buy value-oriented stocks and then create income by selling covered calls against them.
The Fed is committed to dropping interest rates as low as possible. So yields on money-market funds, savings accounts, certificates of deposit, and other so called "safe" investments are coming down.
The only way to generate high rates of return without taking on high levels of risk is to sell covered calls against high-quality, blue-chip stocks. If you're not doing this, then you're missing out on one of the best income-generating opportunities of your lifetime.
And you don't have to attend an AA meeting in order to do so.
Best regards and good trading,
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