Make Extra Income From the Stock Market
Earning’s Season is in full swing, and there are many opportunities to use the stock market is a part-time business and make some extra money. This brief article explains Writing Covered Calls—an everyday strategy for the common guy and gal. Please read it carefully and thoroughly. There is an interesting thought process behind this article. Let me share this for all. I write that because quite often many people feel that if a thought has numbers to it, they can’t or won’t understand it. Numbers scare some people.
But some people see numbers like the following and see a great future life and a prosperous retirement. To be sure, even though we’ll use real numbers from a real deal, there is nothing you can’t do. We choose a strategy to make $1,000 a week or more. The strategy is Writing Covered Calls. There are some hidden facets of this process that do not meet the eye. First, is the makeup of the whole process—the contents or ingredients—that make the process work.
Quite simply, the two main components are a stock and an option on that stock. We use the stock as the asset upon which we conduct an activity—in this case, a money making activity. It’s sort of like rental real estate. A house you buy could be used to fixup and resale, or used for your personal residence, or sit vacant, or you could use the house to rent to others. To make this financial metaphor complete, what if we let these renters have an option to buy this house in a year or so, and we’ll set the price for this future sale right now.
You know this happens in real estate all of the time, but did you know it happens millions of times a month in the stock market. You can buy rental stock and then sell to someone the right to buy your stock in the future. We usually rent our stock out for 4 to 6 weeks at a time. Here’s an example. JCP (JC Penney) is about $9 a share. 100 shares would cost $900. But you can leverage this with margin. Your broker will let you borrow $900 and buy 200 shares. You put up half and they loan you the other half.
So $900 can buy 200 shares. Now it’s time to find a renter, and there are thousands upon thousands of people who will buy the right to own JCP. Why? They’re hoping the stock will go up, even way up above $9. If so, their option may be worth more. This is a risk most people should not take, but millions do. Straight options are too risky for the average investor. But we’re not buying this option. We’re selling it into the market, to someone who wants this extra risk. They take the risk and we take their money.
Here’s the deal. Those $9 options are 70¢ right now. Options are in 100 lot shares of stocks. We have 200 shares, so we can sell for 70¢ each option on our 200 shares. 200 times 70¢ is $140. Pause. Think this through. The market just gave you $140 to lock in the price of your JCP stock at $9. Whether the stock goes up, stays the same, or ever backs off a little, you get to keep the $140. That’s for tying up $900 for four weeks. You made $140 no matter what. You figure out the rate of return.
We don’t like percentages, except as a barometer or point of reference, as we like cash on cash. $900 rents our options out for $140. $9,000 would make you $1,400 for the month. This is cash which can be used to retire, or take out to pay the bills, or even buy more stock. It’s your money. And if you like this stock in 4 or 5 weeks, there are added ways to keep the stock and rent it out again next month.
10%—LET’S EXPLORE IT
Again we use percentages upon which we base our decisions. Over the years, after tens of thousands of trades, we’ve found that we can find options that are between 3% and 6% of the stock price. With our JCP trade above we get a 7.7% return, but with margin (buying the extra 100 shares) we get about a 15.5% return. To figure this out: take $70 or $140 (our profit) and divide by $900.
Okay, here’s the point of this commentary: What if we go looking for a higher return? Granted there are more concerns, like earnings, the recent charts, etc. For example, what if we find a $5 stock with $5 call option of 75¢. A ten percent return would be a 50¢ call option on a $5 stock, or a $1.50 option on a $15 stock. That’s good, right? Okay, but what if we do a 10% option trade or double the amount of stock? This would be a margin purchase of the stock.
And we have one recently with a $4 stock and the $4 call option at 85¢. And that is not on margin. $4,000 would buy 2,000 shares of stock and you’d take in 2,000 times 85¢, or $1,700. That one trade would potentially pay you thousands of dollars are year. We call it assets producing income.
This is a one-two punch: Take an asset and sell for ash a position against it. I’ve written a New Special Report called Job Free Income. Go to wadecook.org for your FREE copy.
© 2015 Wade B. Cook. All Rights Reserved.
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