WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
CHECK OUR TRADES ON OUR MeWe PAGE!


How to boost your investing income and portfolio size

The ideas presented here are not new but they are just less known. There is a great paradox when investing in the stock market for the purpose of creating a personal wealth and financial independence. Advisors and gurus tell us that we must invest a lot of money and rather very early in your lifes to retire comfortably.

So, how much money have you been told to save of the course of your lifespan? Susan Orman not so long ago advocated that in order to retire comfortable, people will need $5 million or even $10 million saved in their retirement accounts! That is ridiculous!

And the paradox?

When we are young and plenty of time to invest and build our wealth, we do not have enough money to invest.

When we have enough money to invest as we progressed in our professional careers, we do not have enough time for the market to grow our wealth.

Due to this paradox, we only capture a small potential of the market wealth. We save less and give the market less time to grow.

Fortunately, there is a way to change it!

Well, at least, improve it. You can adopt leverage to your portfolio and invest more money when you have little money, diversify, and leverage your portfolio over time.

Ian Ayres and Barry Nalebuff wrote an excellent book about this less known strategy: Lifecycle Investing. It is an excellent approach to safely leverage your investments in your 20’s without endangering your savings. I myself am implementing these strategies in my own portfolios.

The greatest strategy I use and consider an excellent idea (derived from the book) is to use LEAPS calls to capture the market move with less money. Let’s say, if you buy 100 shares of SPY index (typically advocated by Warren Buffett), you will need $29,544 at the current market price. How many starters do have this amount of money? I didn’t have it. I still do not have that much.

Even if you decide to use margin it will cost you $14,779 to buy 100 shares of SPY. Still beyond reach of many 20 years old today. And given that many Americans do not have enough saved (average is $60,000 in the retirement accounts) it is beyond reach for many to pust that much money into SPY.

If however, you buy 3 years LEAPS call contract, it will only cost you $4,210 (when you buy 290 strike in the money call). So, you control 100 shares of SPY for only $4,210 !! A brilliant idea! And when do you think the market will be in three years? A high chance is, it will be up. Significantly up! If the market (SPY) goes up to $400, you will make $6,790 on your $4,210 investment in three years! A nice 161% ROI compared to only 23% if you bought shares out right.

But what if the market tanks and it takes for more than 3 years to recover in order to make any money on your calls? What if the calls end out of the money and lose all the value?

Then you implement covered calls strategy against those LEAPS you own. You keep selling monthly (or even shorter) covered calls to lower your cost basis. If done correctly, before the end of the LEAPS you will own them for free. And then you can decide to let them go and expire them or if there is any value (mostly there will be a value), close them for additional profit or roll them up and into the next 3 years term…





3 responses to “How to boost your investing income and portfolio size”

  1. I am new to investing and receiving dividends. I study all possible ways of investing. Thank you for sharing this information and your experience!

  2. s b says:

    I don’t understand the paragraphs. If you lose all the value… how can you do covered calls?

    Please clarify. Thanks.

    ______________

    “What if the calls end out of the money and lose all the value?

    Then you implement covered calls strategy against those LEAPS you own. You keep selling monthly (or even shorter) covered calls to lower your cost basis. If done correctly, before the end of the LEAPS you will own them for free. And then you can decide to let them go and expire them or if there is any value (mostly there will be a value), close them for additional profit or roll them up and into the next 3 years term”

    • Martin says:

      Typically you buy an in the money LEAPS, but if the stock drops below your strike of the LEAPS and stays there until expiration, that LEAPS will lose all its value.

      So, if you buy 3 years LEAPS contract, for example SPY 285 strike, it will cost you $4,490 dollars to buy it. Then, the market enters into a recession and SPY drops to 190 a share and for the next three years, it would be oscillating between 190 and 250 a share an never reaches 285 again. Then your LEAPS loses all its value and becomes zero. You just lost the entire $4,490 investment.

      To avoid this, you start selling covered calls against those LEAPS. Let\’s say, you manage to keep collecting $250 a month, every month for the next three years. If we exclude the first month and \”roll out\” period, that is 32 months of diligently selling covered calls and collecting $250 a month. You will collect $8,000 in premiums. In this case, if the LEAPS end up out of the money (OTM) at the end of the period, and loses all the value, you are not panicking because you collected more premiums than you paid.

      In today\’s market, I do not expect corrections or recessions last long that it was in the past. Thanks to computerized trading, all these event are now faster and last shorter periods of time. The 2008-2009 recession took 1.5 years to bottom and three years to fully recover, Today\’s sell off is almost entirely recovered (although we may dip down again). So I expect the LEAPS to be OK at the end of the three year period.

      If however, they will not be OK, let\’s say, I purchased 300 strike before 2020 crash and now I have 3 months to expiration (a roll out period), I am sitting on a loss as the LEAPS will be valued at 11.80 per contract. Then I will roll this again to 300 strike next 3 years expiration. It will cost me $3,670. The difference is $2,490 debit to pay to roll those LEAPS; given that we have been sitting the whole time doing nothing, but we weren\’t, we were selling the covered calls, but let\’s say, we only collected $80 per month premiums instead of $250; then we have collected $2,560 in premiums and still offset the LEAPS roll. Of course this would put us back to the beginning of the entire game, but hey, how many times in the next ten years you will see panic and selloffs like the one in 2020? If you answered once, then you will have a one break even trade and two extremely profitable trades.

Leave a Reply

Your email address will not be published. Required fields are marked *