By Aussie Rob
G'day Folks, Aussie Rob here ... It's time to rough up ya stocks a bit and start making some serious profits. No more pussyfooting around by being gentle with the stock that you're holding. It's time to get serious and put your stock to work. Stocks are made for using and abusing, not for tucking away in a neat little portfolio.
By roughing up your stocks a little each month, you could be extracting an extra 3%, 5% or maybe even more outta your stock portfolio each and every month with very little extra work. If you're ready for a little rough play, roll up ya sleeves as I teach ya step-by-step how to do it.
We gotta start gentle as we get a bit sentimental here...
So, Aunt Mabel left you with 1,000 shares of stock when she passed away a few years ago and you have kept them because, "Well, they don't really owe me anything 'cause Aunt Mabel gave 'em to me."
Can you relate to this? You're among many others who have been bequeathed stock and kept it because of the sentimental value. You kinda feel guilty selling it because it was Aunt Mabel's. After all, she was your favourite aunt, wasn't she!
Well, take a look at this:
Imagine your portfolio consisting of: companies 1, 2, 3 and 4 with 1,000 shares each. And let's assume all of the stocks in your portfolio are good Blue Chip stocks that old school investors bought and held.
What can you do with this stuff? After all, if you leave it in your account for 20 years, like so many of the old school do, then really, all of it is just 'stuff' because it's not doing anything for you. All that is happening is every good year, the value of your portfolio goes up and every bad year, it goes down.
Surely, there's something else you can do with this portfolio to generate some income, isn’t there? Sure there is, you can rent it and get an ongoing residual income from it.
If this story sounds like you, then you’ll be kicking yourself when I show you what you have been missing out on. Don’t kick yourself too hard. You didn’t know what to do before now, but, in a minute you will know what to do.
Just as man has evolved from apes, or so some people believe, the evolution of trading stocks is evolving too. In the dark ages, traders used to buy and hold stocks just like you’re doing right now with Aunt Mabel’s stock. Now, more and more traders from the 'new school’ are breaking tradition by trading smarter and getting their stocks to work for them instead of them working for their stocks.
Let’s take a look at the sample portfolio that we mentioned previously:
That’s a grand total of just more than $266,000 but what is it doing for you? It’s just stuff until you put it to work. So what are we gunna do? We’re gunna rent the stocks. That’s right; we’re gunna sell covered calls against them.
The objective here is that we don’t want to get called out so we have to sell 'outof-the-money’ calls. Here’s an example of what we could do assuming it is December:
Now we’re talking! We’ve now put Aunt Mabel’s stock to work and we made $1,650 for doing what? How hard was that? Too easy, eh! It’s another 'nobrainer’ that can make us an ongoing residual income month after month. It’s no different to owning real estate and renting it out. If Aunt Mabel left you her home, you wouldn’t just leave it empty, would you? Of course you wouldn’t. You’d rent it out and you’d enjoy the rental income each and every month.
Notice how we wrote 'out-of-themoney’ calls since the objective was to earn rental income and not to get called out because we don’t want to lose the stock. But what if the stock rose sharply and you did get called out? Let’s take Company 1 for example. The person who 'called you out’ would have to pay you $45 for each share. You would then simply buy the shares back.
Called Out is when your stock is taken from you if it closes above the option strike price at the option’s expiration date. In this example, we used the $45 strike price so if the stock closes above $45, your stock would be taken, however, you would be paid $45 for each share. You see, by selling a $45 call, you’re selling someone the right but not the obligation to buy the stock from you at $45. If the stock was say, $46 at the option’s expiration, the option holder would exercise their option to buy the stock from you at $45 because it is $1 under the market value. On the flip side, if the stock closed at $44, the option holder wouldn’t exercise their option to buy the stock from you at $45 because they could buy it at market at $44. The option holder has the 'right’ but not the 'obligation’.
Alternatively, as the stock rose close to the strike price of the call, you could buy back the call you sold and then sell another one that is further 'out of the money’. This repair strategy can actually make you more money as you’re trading the Bell Curve. As time passes, the sold calls lose time value so you should be able to buy them back cheaper than what you originally sold them for. You’ll be paying extra for the intrinsic value component of the option as the value of the stock has risen, but you’ll make it back and then some, when you sell the next strike out. Imagine, a trade going wrong that ends up making you more money... How sweet is that?
So there you have it folks, you now know how to put Aunt Mabel’s stock to work. Imagine bringing in an additional $1,650 or more, six times a year? That’s almost $10,000 a year for doing what? Nothing. If you did it 12 times a year, you’d bring in you’d bring in around $20,000 extra.
Can you do it 12 times a year? You sure can. Just like renting out a house and having a tenant pay you every month. When you paper trade for a while and really get to know your stock, you'll be able to do a lot better than the example I gave you as better timing produces better results. By trading the Bell Curve, you'll send your extra profits through the roof.
You'll be amazed at just how much you can make by selling calls against the stock you already own. There are a lot of stocks out there that can generate more than 5% per month! Don't forget that this is an additional 5% you would not have been getting before.
What if you margined your stock and bought more? You'd then effectively be earning an extra 10% per month in addition to whatever capital gains you earned if the stock increased in value. If you can do that for a year, you'll double the value of your portfolio.
What if you can only do half of that? Or a quarter? It's all a bonus just for using and abusing your stock. Don't ya think it's worth 'roughing up' your portfolio a little for an extra 10 or 20 grand a year?
So there you have it folks, another strategy for making a few extra bucks by writing covered calls.
Good luck…
To learn more about renting shares and to receive my FREE DVD information package, please go to www.rentyourshares.com. Check out www.LifestyleTrader.com for more great trading information.
Aussie Rob has just released a brand new Covered Call training DVD called Aussie Rob’s Share Renting DVD that teaches step-bystep how to write Covered Calls.
lifestyletrader.com.au/products
