(Martin D. Weiss is away. David Dutkewych, editor of the Weiss Million-Dollar Ratings Portfolio newsletter and the trader for Ultimate Stock Options and Supercycle Trader, delivers Steps 2 and 3 of his special report.)
Last week, I told you about Step 1 of my Triple-Yield Income Strategy: How to safely build a portfolio of high-quality dividend stocks with great yields despite the current low-interest rate, high-volatility market environment. In just six weeks my subscribers …
Took home $13,000 in cold, hard cash …
Were well on their way to earning 7% to 8% a year …
In my real-world portfolio …
Without taking on a ton of risk.
Today, we’ll explore Steps 2 and 3 of this strategy, which focus on potentially banking even more income by letting OTHER investors:
PAY YOU an instant dividend to purchase high-quality stocks at the price you want.
PAY YOU a second instant dividend to sell high-quality stocks at the price you want.
So, let’s get started …
Triple-Yield Income Strategy Step 2: Build a portfolio of Weiss Buy-Rated dividend-growth stocks on the cheap by selling cash-secured put options.
What is a cash-secured put option? Let’s start from the beginning …
When you buy a put option, you get the right — but not the obligation — to sell the underlying stock at a specified price up to the option expiration date. For this right, you pay the option buyer a fee, called the option "premium." A put option buyer is also called an owner or holder.
When you sell a put option, you get the obligation — but not the right — to buy the underlying stock at a specified price up to the option expiration date. For this obligation, you get to collect a fee (the premium) from the option buyer. A put option seller is also called an option writer.
When you sell a put option, you need to set aside enough cash to buy the shares if the option buyer decides to sell ("put") the stock to you.
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I know this sounds complicated, but it’s worth it. By selling cash-secured puts, you profit from two amazing things:
First Amazing Thing: You get to collect the premium on the option you sold, no matter what. The stock can go up, down, sideways … whatever. You get to keep that premium regardless.
That’s why I call it an “instant dividend.”
|How much money? That depends on the amount of the premium.|
How much money? That depends on the amount of the premium. But let’s say you want to own 1,000 shares of XYZ stock and you sell a put option for a premium of $1.50. You would instantly collect $1,500 (1,000 shares X $1.50).
Second Amazing Thing: When you sell a put option, you get to determine how much to pay for the stock, if the stock is put to you.
You simply pick the price you’re willing to pay for the stock, make that price your strike price, and sell the option. If the stock is put to you, fine — you wanted to buy it at that price anyway. If it’s not put to you, you have no further obligation.
Selling cash-secured put options pays you a premium that you get to keep no matter what happens AND targets a buy price you like. That’s a win-win.
Triple-Yield Income Strategy Step 3: Write covered calls on the stocks you own to boost your income and sell your stocks at a premium.
What is writing a covered-call option? It’s very similar to puts …
When you write (sell) a call option, you get the obligation — but not the right — to sell the underlying stock at a specified price up to the option expiration date. For this obligation, you get to collect a fee (the premium) from the option buyer. A call option seller is also called an option writer.
Just like when you sell a put, when you sell a call you get to collect the premium on the option you sold, no matter what. The stock can go do whatever it wants and you get to keep that premium regardless.
That’s why I call selling calls another way to bank an "instant dividend."
And the amount of money you keep depends on the amount of the premium. Let’s say you own 1,000 shares of ABC stock and you sell a call option for a premium of $2.00. You would instantly collect $2,000 (1,000 shares X $2.00).
Similar to puts, you pick the price where you want to sell the stock: Your strike price. If the stock is called away from you, great — you wanted to sell it at that price anyway. If it’s not called away from you, you have no further obligation.
Selling covered calls pays you premium, boosts your return on the stock, and doesn’t increase your investment risk. Covered call strategies tend to outperform outright stock ownership in flat, down and slightly up markets.
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So, how do I determine what options to sell?
Three Keys to My Options Selection Process:
Key #1: Pick the perfect strike price. This is always my starting point for selecting options. For covered calls, the strike should almost always be higher than your purchase price of the underlying stock. This helps reduce your market risk. And for cash-secured puts, the strike is almost always below the current market price of the underlying stock.
Key #2: Pick the right expiration date. This is also very important. Some investors are tempted to select expiration dates farther out because of the higher premiums. But if you shorten your time-horizon a bit, you can get even more premium on a relative basis. (This has to do with technical factors, like time decay.) It also makes selling future rounds of call options easier.
Key #3: Throw in some technical analysis. Technical analysis — a fancy name for studying stock charts — is key to when I sell covered calls or cash-secured puts. If the stock price is trading near support, the timing isn’t right for selling covered calls — but great for selling cash-secured puts. And vice versa: When a stock is trading close to resistance, the timing is better for selling covered-call options.
Wow. I know this article and last week’s have been a mouthful. So, let’s just review the nuts and bolts of my Triple-Yield Income Strategy …
Step 1: Growth & Income Focus: Identify high-quality, buy-rated Weiss Ratings stocks with above-average dividend yields and consistent dividend growth.
Step 2: Buy at a Discount: Buy stocks at a discount by selling cash-secured put options and collecting "instant dividend" premium income.
Step 3: Sell at a Premium: Earn even more instant dividends by writing covered call options, possibly several times a year, while selling stocks at a premium to your target price.
Following my Triple-Yield Income Strategy can lead to higher income without taking on any additional investment risk. Not bad for an income-seeking investor in today’s world of near-ZERO interest rates.
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