PATHWAY TO PROFITS: Lesson #4 Your Retirement

PATHWAY TO PROFITS: #4, Your Retirement. We’re here again with more information. We hope by now that we have your attention. We hope you see that Writing Covered Calls is not a “get rich scheme.” We’re tired of those, aren’t you? WCC is however a “Get Rich Steady” Process. It’s a “Get ‘Cash-Flow’ Rich Strategy.

Today we’ll do a few more deals. Oftentimes, repetition is the best teacher. All of these lessons are to help you learn and use this “workhorse” method. As we’ve said before, we believe in getting people excited with knowledge.

When I first started doing seminars, I was told not to use numbers. One guy told me, “Wade, when you’re talking theory you soar with the eagles, but when you use numbers, you’re down with the turkeys. In a way this is true. However, when we talk money, investments and the like, we have to use numbers. I try to make them fun, explaining and often over-explaining them. Some people see numbers and balk, others see numbers—like the ones I’ll show you shortly—and see their retirement. They see living better, getting out of debt and spending more time doing what they love to do.

So, let’s get into the numbers of this lesson and see what you think.

Here is a stock taken for a recent TDT. It is UCO, a Bloomberg Oil Stock. It’s going for $8.70. The next month out calls are going for 75¢ X 90¢. The X in this formula is read as “by.” Again, that is the bid and ask (See lesson #2 if you need help on this). We sell at the bid or put in a “limit” order to sell at a different price. If we place a market order, we will get filled at 75¢—unless the stock price moved in the few seconds it took to place the order. I suggest this: as a new investor, only place limit orders, even if it’s the same as the market price of the stock.

Okay, let’s see how this all comes together. The One-Two Punch: Buy Stock, Sell Call. We buy 1,000 shares. You can buy any amount of shares you want, but I suggest a few things:

  1. Always buy stocks in 100 share increments
  2. If you have $10,000 to trade, then do 3 or 4 trades.
  3. We use margin for these trades, but it is a form of debt and should be used sparingly.

We spend $7,700 to buy the 1,000 shares, but only put one-half of the money. That would be $3,850. Now we sell 10 contracts of the $8 calls. They are 75¢, so we take in $750. That’s a nice ash amount on $3,850.

Now, the stock is going to go up, down or sideways. We look for stocks that move slightly. “Trust Movement.” No matter what the stock does, we get to keep the $750. That’s what we were paid to obligate ourselves to delivering this stock at $8. If it does go up to $8 or above, we will get called out of the stock. Called Out is jargon for sell. This all happens electronically.

We can end this trade anytime by buying back this option. We have a lesson on the Buy-Back coming up soon. Here is the reason I bring it up here. There is a new risk we take on when we Write Covered Calls. It’s what we call “Opportunity Lost Risk.” We take in cash now—and sometimes a lot of cash—but give up anything above the strike price. If this stock runs up to $9.20, we do not participate in those gains or profits. So, if you have a high-flying stock, don’t write covered calls on it.

Okay, a quick check. What are you thinking? Are you ready to get going? We hope to win you over to our WIN Service. We’ll keep going. There are some good lessons coming up.

Before we go let’s give you one more trade. That’s the point, isn’t it. Investing is for the long-term—say, 6 months or so. Trading is for cash-flow purposes, oftentimes, a few days or a few weeks. We can be both and Investor and a Trader.

MRO is the ticker for Marathon Oil. The stock is at $10.90. It has moved up with oil moving up. The next month out $11 calls are $1.03 X $1.07. We’ll try to keep this and all of these Pathway to Profits below $5,000. Let’s buy 400 shares (without margin), or 800 shares (on margin). Either way the cost will be $4,360.

Now we sell 8 contacts (on our 800 shares) for $1.03 X 800, or $824. Do you get the numbers? And more importantly, if you do not understand every detail, do these numbers pique your interest—hopefully creating a desire to learn more?

$4,360 into the stock, and you take in $824 in income. Five or six batches of this type of trade and many people can start looking at retiring .  .  . or at least cut back their work schedule.

Thanks for reading. We’ll see you in Lesson #5 with more Street-Tested Knowledge.

Stock MarketWade Cook