Thursday, July 17, 2014
It was an honest mistake.
Nancy, the host of the neighborhood Independence Day barbeque, asked me to get a bag of pancetta out of the freezer in her garage. I went to the freezer and grabbed a bag labeled "bacon" – thinking that was suitable to complete my task.
As I unwrapped the tinfoil, however, I uncovered a stack of $100 bills. There must have been $20,000 in frozen cash tucked away in that Ziplock bag. "Is there something you might want to tell me?" I joked.
"Yes," she said. "Bacon isn't the same as pancetta. We'll talk about the rest later."
After the barbeque, Nancy and her husband, Gus, confided in me they had over $80,000 in cash stored in various locations throughout their house. "It just didn't make sense," Gus said, "to let the bank hang on to our cash without paying us any interest."
"The stock market is too risky," he continued, "and I really don't know what to do other than stuff it in my freezer in case of an emergency."
"What if," I responded, "I could show you how to make 7% over the next three months and then about 2% per month, every month from then on?"
So why am I telling you this? Because you can use the same strategy to turn some of your own stocks into cash-gushing machines. (If you're not familiar with the idea of selling covered calls, you can learn more about the strategy here.)
Let me walk you through an example trade...
Last week, I was considering recommending a covered-call trade on a beaten-up gold stock to my S&A Short Report subscribers.
The stock was trading at about $8, down from a high of $19 and just off its May low of $9.20. The October $8 call options were trading for $0.60.
We could have bought the stock at $8 and then sold someone else the right to buy the shares from us for $8 any time before option-expiration day in October. We would have been giving up any upside potential on the shares. But we would collect $0.60-per-share profit right away for selling the call option.
That's a $0.60 gain on an $8 investment. That works out to 7.5% for just a three-month trade.
If the stock was trading above $8 on October expiration day, we would sell the stock for $8 per share and keep the entire $0.60-per-share option premium. If the stock closed the day below $8 per share, we would keep the shares and the entire premium. Then we would be able to sell another series of options against our shares to collect more income.
Selling covered calls is a low-risk strategy that allows you to turn a beaten-up stock into a cash-gushing machine. The income you receive upfront generates large monthly returns, and it hedges the risk of a small downside move in the stock. And it's a far better strategy than sticking your cash in the freezer.
Best regards and good trading,
Dr. David Eifrig also uses covered calls regularly to generate safe, double-digit income streams. "For many folks, learning this strategy is like walking out of a dark cave and into the sunlight," he says. Learn more here.
Last week, Jeff shared another one of his favorite ways to profit in the market. "This is an ideal strategy for adding exposure to a sector where the intermediate-term trend is bullish, but where the short-term trend may still have some downside risk." Get all the details here.
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