The Truth About Money, Part Eight
THE MYSTICAL, MAGICAL TRUTH ABOUT MONEY Wade B. Cook
NUMBER THREE: There are ways to accelerate this process. We call in R.U.N. That stands for Ramp Up Now. This is just a variation on the theme of generating monthly income. It’s a way to enhance the “cash to asset to cash” formula. You use the money you take in for selling the call and buy more stock now, or as you’re doing the deal.
Let me give an example. We’re doing a trade—a nice looking covered call. It’s on RSH, The stock is at $2.40 (January of 2014). The $2.50 calls are 26¢ X 29¢, or 26¢ to sell. Selling the $2.50 calls, means someone has the right to buy our stock for $2.50 anytime on or before the expiration date, about four weeks out. If we purchase 2,000 shares of the stock for $2.40 on margin, meaning we put up half of the money, we will spend $2,400 and now own the 2,000 shares.
Now we can sell 20 contracts of the $2.50 call, giving someone the right to buy our stock at $2.50 (which we are happy to do) for 26¢ times 2,000. That’s $520 that someone is willing to pay us to buy our stock at $2.50. They obviously hope the stock goes much higher. If it does we will sell them our stock at $2.50, taking in another $200 (that’s 10¢ times our 2,000 shares).
Now, something new. This is a standard covered call. However, know that we are going to take in $520, we now have $1,040 to spend. This is the margin we constantly talk about. Use margin sparingly and wisely. What can we do with $1,040 of buying power? Well we could buy 400 more shares of this stock. If so we could sell 4 more contracts of the options, and take in even more money. 400 times 26¢ is a little over $100. It’s impressive even by Luke Skywalker terms.
Our original $2,400 has now generated the $520 and this new $100, and we now own 2,400 shares. What will your life be like if you can get 10% to 20% cash on cash every month?