Consider it this way: You buy homeowner’s insurance to protect the value of your home. You buy car insurance to protect you from a crash. You use insurance for just about every valuable asset you own – because it’s simply too risky to do without it.
Today, I want you to just consider a simple way you can protect your portfolio with a form of insurance – and even better – get paid along the way.
My live 60-minute event will show you exactly how to get started. Click here to be my guest.
If income is your goal, you should strongly consider using this special form of insurance. Here’s why…
I’m talking about options – but for a minute, forget that I even mentioned the word. That’s because, at a basic level, options are just another form of insurance.
For instance, take covered calls, one of the safest and most recognized of all options selling strategies. The strategy is the only options selling strategy allowed in retirement accounts.
Selling a naked put is the same as selling a covered call. They have identical profit and loss profiles. So why can’t investors use them in retirement accounts?
Before I go any further, let me explain a little about naked puts. A “naked put” is an uncovered put option that you have sold. It is “uncovered” (or “naked”) if you have not shorted an equivalent number of shares of the underlying stock. If the put option is assigned to you, then you will have the shares put to you at a price equal to the strike price per share.
We Like it Naked
Microsoft (NASDAQ: MSFT) shares are trading for $58.70.
You aren’t necessarily pleased with buying the tech giant at current prices. But you want to buy the stock at $55. So you decide to sell one naked put at the $55 strike price.
As a result, you immediately receive roughly $86 in options premium. You’re essentially being paid to agree that if MSFT drops below $55, you will buy 100 shares at your desired price of $55. Since it cost you $5,500, and you earned a $86 premium, your total cost for 100 shares is $5,414. Or $54.14 per share. That’s a 7.8% discount from the current share price of $58.70
The most you can make with a naked put is the amount you sold it for, in this case $86. As long as MSFT doesn’t move over 6.3% lower (below the short strike of $55) at the time the put option is due to expire, you can continue to sell puts for income in perpetuity.
If MSFT stock happens to push below your short put strike of $55, you will have 100 shares put to you for $55/share, but you received $0.86/share in option premium when you sold the put. So your cost basis is actually $54.14.
I’ve sold puts for months in stocks and ETFs like Pfizer (PFE), United States Oil Fund (USO), Russia ETF (RSX), Starbucks (SBUX) and many more in my Income Cycle Portfolio. Moreover, I’ve managed to lower the cost basis from 15% to 50%. Again, some investors choose to use the premium from puts as a way to lower the cost basis of a stock or ETF they wish to own for the long term while others use the premium as a source of income.
So what happens once you are assigned shares?
If you are assigned shares, no worries.
When using the income cycle strategy we simply use a covered-call strategy.
So what is a covered call?
Covered calls are an options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. The strategy is often employed when an investor has a short-term neutral-to-bearish view on the asset and for this reason decides to hold the asset (long) and simultaneously have a short position via the option to generate income from the option premium.
For example, let’s say our MSFT pushed below our short put strike of $55 at expiration. We now are the proud owners of MSFT for $55 minus the amount of premium we brought in from selling puts on MSFT.
Again, you like the stock’s long-term prospects, which is why you decided to sell puts on the Microsoft stock in the first place.
Now that we have shares of MSFT in our possession we want to continue the process of collecting income by selling calls against our shares. If you sell a call option at the $58 strike on MSFT for let’s say $1, or $100 per contract, you earn the premium from the option sale but cap your upside. One of three scenarios is going to play out:
- MSFT shares trade flat (below the $58 strike price) – the option will expire worthless and you keep the premium from the option. In this case, by using the covered-call strategy you have successfully outperformed the stock.
- MSFT shares fall – the option expires worthless, you keep the premium, and again you outperform the stock.
- MSFT shares rise above $58 – the option is exercised, and your upside is capped at $58, plus the option premium. In this case, if the stock price goes higher than $58, you keep the capital gains of $3, plus the premium of $1 for a total of $4. Remember, we are typically going out only one to two months when selling calls so this is a return of 7.3% in roughly two months.
As I have often stated, most investors think of options as high-risk, speculative strategies where large losses can be incurred. While this is certainly true of some options strategies, covered calls are actually more conservative than investing in ETFs or stocks alone.
In other words, a covered-call strategy is SAFER than buying a stocks or an ETF.
Because covered calls:
- 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
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.
So again, why would any investor choose to shy away from such a proven income strategy that has outperformed the market and dividend-paying stocks over the long term?
It’s known as The Income Cycle Strategy.
The strategy is simple. We sell puts, sell puts, sell puts until the stock you want to own falls below the strike price where you are comfortable owning the stock. Once you are issued stock you begin to sell calls, sell calls, sell calls until your calls push above the strike price where you are willing to sell your stock. As a result, you lock in the premium from the call, plus the capital gains where you were assigned the stock and the strike price where you willing to sell the stock. Rinse and repeat.
Discover how to start trading the Income Cycle Strategy right now!
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