For some reason, self-directed investors seem to ignore what is, in my opinion, the best, and easiest, income strategy available to investors today.
I’m talking about poor man’s covered calls.
Learn how to earn 4X income from the biggest and safest blue-chip stocks.
Haven’t heard of the income strategy? Good. Because you are about to learn how to create your own “virtual dividends.”
First of all, in order to take advantage of this options strategy, you do not – I repeat, DO NOT – need to have experience trading options. You can use poor man’s covered calls in a retirement account. And best of all, you can profit from poor man’s covered calls using a regular old ETF or blue-chip stock. In fact, it’s the way I prefer to use the strategy.
But before I go into further details on how to earn virtual dividends with this income strategy, let’s discuss a few basics.
So, what is a poor man’s covered call?
Poor man’s covered calls are an options strategy whereby an investor holds a long position in an asset using long-term options, otherwise known as LEAPS, and writes (sells) call options on that same asset to generate increased income from the asset.
For example, let’s say that you want to own shares of Microsoft (NASDAQ: MSFT). You like the stock’s long-term prospects as well as its share price but feel in the shorter term the stock will likely trade relatively flat to lower . . . perhaps within a few dollars of its current price of, say, $118. The problem, you don’t want to fork out $11,800 to buy 100 shares of the stock at $118, just so you have the ability to create your own virtual dividend. It’s the same reason that inhibits most investors from creating their own virtual dividend.
But what if you didn’t have to pay $11,800? What if you only had to pay $3,370, .a discount of 71.5% off the cost of owning the shares outright, while still creating the same exact dividend? A dividend that ranges from 8% to 12% every 45 days?
Let me explain.
If you sell a call option on MSFT at the $120 call strike, you can earn the premium of roughly $3.40 from the option sale or $340 per contract sold.
One of three scenarios is going to play out:
a) MSFT shares trade flat (below the $120 strike price)– the option will expire worthless and you keep the premium ($340 per contract sold) from the option. In this case, by using the poor man’s covered call strategy you have successfully outperformed the stock.
You’ve also locked in a return of roughly 10.1% over 56 days and you can repeat the process over and over in perpetuity. That’s right! You can earn roughly 5% a month in income using a poor man’s covered call on one of the most widely held stocks in the market.
b) MSFT shares fall– the option expires worthless, you keep the $340 premium, and you cover some of the downside risk, $3.40 to be exact, associated with the decline in MSFT’s share price.
c) MSFT shares rise above $120–if MSFT shares push above our call strike of $120, again no worries. In this case, if the stock price goes higher than our strike price of $120, our LEAPS will increase in price and we still get to keep our original premium of $3.40. We will need to buy back our short calls prior to expiration, but it’s one additional step that is well worth it as we avoid assignment and lock in profits.
Many investors mistakenly think of options as high-risk, speculative strategies where large losses can be incurred. While this is certainly true of some options strategies, poor man’s covered calls are actually more conservative than investing in ETFs or stocks alone.
In other words, a poor man’s covered-call strategy is SAFER than buying a stock or an ETF.
Because poor man’s covered calls:
- Require far less capital
- Provide some protection in a down market
- Are one of the few ways an index investor can achieve double-digit returns in a flat or slow-growth market
- Lower your cost basis while decreasing the volatility of your portfolio
- Allow investors to bring in income on a consistent basis
Remember, covered calls make money when stocks are slightly higher, flat or down. You only get the underlying stock “called” away if it rises significantly.