Part Nine: The Truth about Money
PART NINE NUMBER FOUR: Let’s move on to LOCC, or Large Option Covered Calls. This is a very exciting strategy, and even extra exciting for those of you who want to park some money somewhere and have it produce big returns. So far, it’s all been about monthly income. The second strategy is about leaving the money alone to build up more of an asset base. This next strategy does this in spades.
Options are written out 7 to 9 months into the future, and some even in January out 2 to 3 years (LEAPS). This strategy is a way to pick up extra income now, and even use that income to buy part of the price of the stock now. There is a whole chapter on LOCC (Or FREE STOCKS) in Paid To Trade Lesson 7.
We’ll use JC Penny’s (JCP). The stock was going for $8.20. It has gone through a rough time, and now has new management. That puts some speculation into the stock pricing, and for us Covered Call Writers, that’s a good thing. We do LOCC deals out 5, 6 or even 7 months. It’s currently January and the July $8 calls are $1.95 to sell. Look at that. It’s almost 25% of the stock price. If we sell the stock at $8, we would have to give back 20¢ times 1,000, or $200. We’ll leave the numbers intact so you can see how it works.
We buy 1,000 shares at $8.20, but do it on margin. This means we put up half, or $4,100. Now we sell 10 contacts of the $8 calls for $1.95 and take in $1,950. That’s right. We have just taken in $1,950 and given someone the right to buy our stock at $8 way out in the summer. They gave us $1,950 to buy this right. It’s cash in our account. We are selling more time and getting paid well to do so.
On margin we have $4,100 of our broker’s money and $4,100 of our own money. But our own money now includes $1,950 that we took in for selling this call. So now instead of having to have $4,100, we still have to have it, but the market just gave us $1,950. We need to put up only $2,150. You’ll soon see that this $2,150 is going to make us $1,950 minus commissions and a little margin interest. We’ll probably net about $1,820 on our $2,150 and it’s all back in our account when this trade ends.
This strategy is a bit difficult the first time people see, that is why in the bonus section we have a whole expose on this LOCC strategy. In short, we are selling time. Time is money. Someone has given us $1,950 to buy our 1,000 shares of Penny’s. If they do, great. If they don’t we still own the stock and can now write monthly covered calls or do another LOCC. It depends on your needs and the conditions of the market.