Posted by Martin February 08, 2014
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The Biggest Scam In The History Of Mankind – Hidden Secrets of Money





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Posted by Martin February 06, 2014
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New trade – MasterCard (MA) buy long stock – building my ROTH

New trade – MasterCard (MA) buy long stock – building my ROTH

Today I bought 16 shares of MasterCard (MA) stock. It was a long wanted trade, but I never did it. At first I bought Visa (V) a few days after IPO for $45 a share and a few months later I sold it for $55 a share.

 
(MORE: January Recap – Compounding Income)
 

I was a chicken. I didn’t understand Visa nor MasterCard and I sold. Now Visa is trading for circa $200 a share. Since my sell, I have been kicking my butt for selling.

MasterCard was selling for $840 a share and that was a bit discouraging. In January the company split the stock 10:1 and $84 a share was “affordable” for me. When the correction in Wall Street started, the stock dropped to $74 a share and even a bit lower. That was something which caught my attention.

 
(MORE: How To Establish A Circle of Wealth – Brick by Brick Investing)
 

MasterCard is not a dividend company I would normally buy. It’s yield is puny (only 0.60%), it’s dividend growth is 29%, but they only have 1 year dividend history.

So why I bought it?

It is the unique business model MasterCard and Visa use to make money. Many people fail to understand this model. The greatest example of that failure is when you saw credit card companies and banks falling during the credit crisis, or credit fees caps, Visa and MasterCard were falling too. But none of them are exposed to borrowers, none of them risk a loss of money unlike lenders. MasterCard and Visa make money on fees whenever you swipe your plastic, be it debit or credit card. That’s it. They do not lend money, they do not deal with delinquencies, nothing like that.

 
(MORE: The Elephant In My Portfolio – Retire before dad)
 

They are just a money processing gateway and they get always paid for it.

This makes them so unique and money cows which made me to correct my previous mistake and buy it. Both are loaded with cash and both have no or little debt.

What else you want?

 
(MORE: Is Anyone Really Surprised by The Recent Stock Market Sell Off?! – The Fast Weekly)
 

I believe, MasterCard will grow back to hundreds level again. I can’t say when that happen, but it will happen. And I want to ride that wave.

To buy MasterCard I used my contingency or conditional trigger order trade. Below see the list of the triggers I maintained for this stock. At the beginning I could buy only 15 shares of this stock, but over time as MA was falling, my buy order was trailing the price and I could buy 16 shares cheaper:

 

02/04/2014 20:02:24 If the last of MA is greater or equal to 75.94
Buy 15 MA at limit $75.94


02/05/2014 20:34:52 If the last of MA is greater or equal to 74.63
Buy 15 MA at limit $74.63


02/05/2014 22:20:39 If the last of MA is greater or equal to 74.27
Buy 15 MA at limit $74.27


02/06/2014 10:44:30 If the last of MA is greater or equal to 74.27
Buy 16 MA at limit $74.27

The last order was fired and executed.

 
(MORE: Value Investors Are Now Buying Apple – Dennismccain)
 

Of course I could buy cheaper if I bought yesterday when the price dropped to 72-ish level, but when using conditional order, you want to set up a bit higher price to give the stock a wiggling space. In that case you make sure you won’t get executed and the stock continues lower and making you a losing position. With higher strike price, there is a better chance that the stock reversal is not a fake and that the stock will continue up.

 
(MORE: January 2014 Net Worth Update – FI Fighter)
 

Of course, it is not bullet proof strategy, but it can save you a few buck by buying cheaper.

And of course, I released cash for this trade by selling my RWX commission free savings as you can read about here. At first I had a dilemma which stock to buy, you can read about it here, but then I made a choice to go with MA this time. My next purchase will be a high yield dividend stock.
 
 




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Posted by Martin February 03, 2014
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Minimum wage? Yes? Then watch this!


 




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My investing Strategy – Dividend growth investing, part 2


Plan and StrategyHere is a continuation of my previous Strategy post, part 1. This time I would like to write about each part of my strategy more in detail, so you can see how I invest.

In the previous post I mentioned that I apply a few different strategies and use different accounts for those strategies. The reason for using different accounts is that some trading or investing has different requirements on cash management and it can be difficult to keep finances in an account organized.

I am a mechanical engineer and I like to have all things organized, sized, and put together exactly as any operational manual says in order to function well. Thus I like to have different accounts for different strategies.

 
(MORE: How I Analyze And Value Stocks – Dividend Mantra)
 

You may not like it that way and keep all your finances and investments together. If it works for you well, there is no need to change what you are doing.

Originally, I used only one account for my options trading and dividend growth investing at the same time, but many times I run into a situation that my options maintenance requirements prevented me from buying a stock I wanted.

Why dividend growth investing?

It was a long journey for me to land on this strategy. I tried almost everything out there, but no strategy satisfied my hunch: income. When my account was small I always was asking myself a question: “Where can I get more money to invest more?”

Dividend Growth Video,
courtesy Dan Mac, Dividend Growth Stock Investing

I wasn’t satisfied with my contributions to my account I did every month. I wanted more money contributed to my account every month which I could take and invest into more stocks.

At first, I invested into growth stocks. I envisioned myself hitting home runs every month. I doubled or even tripled my account at some point, but then I lost everything quickly. This was an eye opener. I realized that all gains I had were not sustainable and I couldn’t be sure whether I could repeat them next time. And losses were eating up my account value more than I was able contributing to it.

Then I came across dividend paying stocks. At first I wasn’t impressed. I considered 3% income too small to make any difference in my account and dividend paying companies too big and lazy to make any capital gains.

I didn’t see the power behind them – power of compounding and growth.

Once I realized how dividend growth stocks work and how they can make you rich faster than any other investment and most important – they can deliver additional contributions to my account, I knew, this was the strategy for me.

 
(MORE: Why Dividend Growth Companies Make the Best Investments – Dividend Growth Stock Investing)
 

Why dividend growth companies are superior?

People who do not invest in dividend stocks say that those companies are limiting their growth. When they pay a dividend, they have less money available for their growth – reinvestment, R&D (research and development), or capex (capital expenditures), and that is the reason, why they lack behind growth stocks.

I thought the exact same thing when I believed I could make more money investing into more volatile growth stocks.Where to invest?

But the reality is different. The way I look at it is that growth stocks are promising you a fortune at some point in the future, which may not happen if you do not buy low and sell high, while dividend paying companies are making you richer slowly over time and during the time before you get to the “some point in the future”.

So ask yourself a question – do you want to wait 20 years for a promised fortune or do you want to receive part of it today?

 
(MORE: Profits and dividends of the stocks of DAX 30 – Dividenden-Sammler)
 

Here are the reasons why I see dividend companies superior to any other companies:

It is a known fact that 50% of all gains of S&P 500 is made of dividends. So why not let your account have the same?

Dividend companies are more cautious with their capital expenditures than their nonpaying peers. Since they have less money left to invest, they invest wisely. I read a study comparing two companies, one was a dividend payer, the other wasn’t paying a dime. While the first was carefully selecting their acquisitions, the second was acquiring one competitor after another in a quest for getting stronger. Later, acquisitions of Leer hurt the company and it almost went bankrupt.

Dividend companies tend to grow at the same rate as their dividend growth. Have you ever noticed that many times you check a dividend yield of a company it states a certain yield, for example 3%, almost forever? When I was investigating dividend investing I checked JNJ yield and I was watching it for a few years. During that period of time, it always indicated the yield oscillating around 3%. How is it possible when the company grows its yield by 9% annually? I bought JNJ many years ago (at that time for a different reason that dividend growth investing). Back then it was trading around $54 a share and its yield was 3.5%. Today, JNJ is trading at $88 a share and its yield is 2.9%.

Dividends are great indicator of company’s health. No matter what Wall Street thinks and how deep they trash the stock because of whatever irrational reason, the company is healthy if it still can afford paying and increasing the dividend.

 
(MORE: Investment Tips – Never Lose Money – MoneyAhoy)
 

Power of compounding

Here comes the best part of dividend investing and why it is a far better strategy than anything else. Since the companies share their income with you now and not anytime in the far distant blurred future, you can take that income and do the following:

 

  • spend it
  • reinvest it

 

If you buy a growth stock, you have nothing left after the purchase. You have to contribute your own money to buy more. You now have to wait for the stock to appreciate in time and sell it in order to make a profit. If you do not sell it, you risk that the stock plummets and erase all your gains.

 
(MORE: Negative Value for my Portfolio… – Financial Freedom)
 

If you buy a dividend stock, you are also waiting for it to appreciate in price and during that waiting time you collect dividends. Then price appreciation isn’t that important to you and you can wait as long as you wish. If the price plummets, you do not mind it, because you are still collecting the same and growing dividend. If the price plummets, you can take that dividend and buy more shares. And you do not have to add more money to your account. And as you buy more shares, you start receiving even more dividends. It is that simple.

Income

Now that you know why I love dividend growth strategy, formulating my dividend strategy is easy. Here are the steps I will be taking to reach my goal. Let me repeat my goal:

My goal is not to reach a certain amount saved or a certain account balance, but make sure all my portfolios can safely generate enough cash flow every month no matter how big the accounts are.

 
(MORE: Developing a Game Plan Using Sector Weighting – RetireBeforeDad)
 

Accounts

I will use this strategy fully on my ROTH IRA account.

I will use this strategy partially on my TD account as a value preserving tool and contributions generating tool. More on this in the next part.

 
(MORE: Is It Ever Too Late to Invest in the Stock Market? – Frugal Rules)
 

Money management

I will be saving cash through commission free ETF in my ROTH IRA account. With my current saving rate and dividend income I can reach my cash purchase amount in four months. During that period I let my free cash waiting in the ETF which also pays me nice dividend/distribution (currently 8.6%).

To summarize it, I will buy a commission free ETF using all my contributions and received dividends to save enough cash purchase amount.

Once I save the cash purchase amount, which currently is $1200, I sell a portion of the ETF to get $1000 out of it.

As soon as I get $1000 out of the ETF, I will purchase a dividend paying stock.

 
(MORE: 11 Monthly Dividend Stocks That Let You Sleep Well At Night – Brick by Brick Investing)
 

Time horizon and saving phases

I have 25 years before I will be legally allowed withdrawing money from my ROTH IRA account. That is a plenty of time to build a nice nest egg. This allows me to split my wealth building effort into three phases:
 

  1. aggressive accumulation phase
  2. consolidating accumulation phase
  3. retirement phase

 
Aggressive accumulation phase

I will dedicate 10 years to buying high yielding stocks such as MLPs, REITs or other industries which offer high yield. I will focus on companies with yield over 4.5% trying to get companies paying around 7 – 8% yield. I will look for companies which increase their dividends and have at least 1 year dividend history. I will not focus on the growth as much as on the yield. I will strictly reinvest all dividends back to these companies.

I will invest into true dividend growth companies only if they offer an excellent entry point (usually during market sell offs).

This phase will end in 2022.

 
(MORE: How To Be A Bad Investor – KrantCents)
 

Consolidating accumulation phase

I will dedicate the remaining 15 years to buying true dividend growth companies. I will be looking for companies offering great growth and yield and focusing on growth more than the yield. I will be looking for companies paying out min. 2.5% yield but offering more than 6% dividend growth. The dividend income from previous accumulation phase should be large enough to help boost my portfolio and add dividend growth stocks quickly and let them grow for next 15 years.

This phase will end in 2037

 
(MORE: Why Should I Become a DIY Investor? – The Dividend Guy)
 

Retirement phase

In 2037 I will be allowed to start withdrawing my cash from ROTH IRA for retirement purposes. I know I can withdraw earlier all contributions, but this is not my plan. To retire early I have a different plan and different account.Relax

Once I will be able to withdraw money from my ROTH IRA account, I will be withdrawing dividends only and I will be withdrawing 85% of it only and reinvest the rest.
 

 
(MORE: What Makes A Good 401k Plan – The First Million is the Hardest)
 

Read previous parts:

My investing Strategy – part 1
 




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Time to switch to conservative options trading


After reviewing last week trading and next week outlook I decided to switch into more conservative option trading. I usually traded options very aggressively but it seems that now it may be time to slow down a bit.

What does it mean taking a conservative trading approach?

I usually take an aggressive approach. That means I select options strike price as close to the underlying price as possible. This works great in rising markets. It offers great premiums and is very profitable.

In falling markets this approach can be somewhat dangerous and you may be forced rolling over often. If your cash in your account is limited, you may run out of rollover opportunities and you will be assigned.

If you do not want to be assigned and still want to ride your trades, you need to step down and take safer trades.

20% rule

And that is all about the proper strike price selection. I call this a 20% rule after J. L. Lee who came up with this strategy in his book “Selling Put Options My Way“. This strategy dictates to select a strike price 20% lower than the current underlying price. Although everything can happen, it is very unlikely that good quality dividend growth stocks will fall more than 20%.

As all my option trades will be expiring or I will be rolling them over, I will be doing so based on the 20% rule as long as the markets stay depressed.

Happy Trading!




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The markets may taper too. How are you prepared for it?


DisasterWe experienced two days in a row of a sharp drop in Wall Street. Is the market heading towards a long expected correction or is this just a dip?

Media is bombarding us with explanations of what’s happening – investors nervous because of bad economic data, bad employment data, bad earnings, slowing China.

And you can feel the nervousness among investors, experts, and folks out there.

Today I have read a prediction from so called experts that the markets may continue falling down because of FED keeping its course and continue in tapering.

On top of that you can find people posting comments such as getting out of the market and stay out in cash. You can feel that they are beginning panicking.

And we only have seen two days in decline.

When reading posts of people saying that they have sold all their stocks and mutual funds and put them into a savings account I feel very sorry for them, shocked for their even worse decision, and happy at the same time for the strategy I selected a roughly year ago.

How are you preparing yourself for a potential correction?

There are a few strategies you may employ to protect your funds, but which strategy is the most superior to others? If you think about your goals and way of investing, set up a few rules, you will come up as a winner from any market correction.

Over the time my investing motto became to sound like this:

My goal is not to reach a certain amount saved or a certain account balance, but make sure all my portfolios can safely generate enough cash flow every month no matter how big the accounts are.

If you shoot for everlasting, growing income, I can only see one strategy which can meet this requirement:
 

  • Dividend Growth Investing strategy
  • Reinvest all dividends
  • Invest regularly thru thick and thin times
  • Stay calm and do not panic, the markets will recover

 

You may argue that this strategy is best for new investors in accumulation phase, but what about those a few years before retirement? Their portfolio will be ruined! Their 401k or IRA accounts would lose 50% as it happened in 2008. What they should do?

Well, if you followed an investment strategy described above, you will not have this problem at all. You will not care what the value of your portfolio is. All you will worry about is your income. And if that stays intact, you will sleep well at night well knowing that your private investing business is doing well.

What are you doing to protect your portfolio? Do you take any extra measures or just stay the course executing your investing plan?
 




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Posted by Martin January 23, 2014
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Is a phony recovery showing its ugly teeth?

Is a phony recovery showing its ugly teeth?

The earnings season so far is actually more disappointing than that absolute underperformance suggests. Too many of the earnings beats are by just a penny or so and too many earnings surprising are coupled with misses on revenue. Others combine an earnings beat with a cut to guidance for the first quarter or all of 2014. And other companies are managing to report an earnings beat only thanks to a clearly one-time factor or a bit of financial engineering using, frequently, share buybacks.

With U.S. stocks ending 2013 at historical highs, investors just aren’t impressed with that kind of earnings beat.

So far in absolute numbers this earnings season could be called somewhat disappointing. About 50% of the 10% of Standard & Poor’s 500 companies that have reported earnings have beaten Wall Street estimates. That’s below the long-term average of 63% and well below the four-year average of 74%.

Want some examples? Then continue reading.

 




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Trade adjustment – Safeway (SWY) put selling rollover

Trade adjustment - Safeway (SWY) put selling rollover

As Safeway (SWY) was drifting lower and keeping my spread between the stock price and strike wider I decided to rollover the trade once more. I already rolled this trade lower once, you can see the trade in this post.

I had the opportunity to roll down my strike and slightly further away in time and collect more cash in premium.

I lowered my strike and thus my potential obligation of buying this stock if assigned for lower price ($30 per share in lieu of the original $34 a share) and yet collected a premium.

I decided to rollover now in case the price continues drifting further down to avoid too wide spread between strike and underlying price which would cause me paying for the rollover instead of receiving money.

If that happens and the stock drops that much down that I will not be able to rollover again for a credit, then I let the put option to be assigned and accept the stock.

In that case my purchase price of Safeway will be $22.15 a share. And that is definitely a price I am OK to accept.

Trade Detail

Here is the trade detail:


01/23/2014 11:53:05 Bought 1 SWY Jun 21 2014 33.0 Put @ 3.76
01/23/2014 11:53:05 Sold 2 SWY Sep 20 2014 30.0 Put @ 2.72

I collected $156.10 after commissions.




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High yield dividend growth stock candidates to boost your income

High yield dividend growth stock candidates to boost your income

As I wrote in my article about saving cash through commission free ETFs I will be soon selling a portion of my RWX holding and buying dividend growth stocks in my ROTH IRA account. I will have my money ready to invest and a question arises what stock to buy.

 
(MORE: A Brief Primer on Master Limited Partnerships (MLP) Part 1: What are MLPs, how do they work, and why should you consider investing in them)
 

In my hunt for high yield stocks I reviewed my existing holdings and only three stocks could be considered for a buy: Lorillard, KMP, and PPL. All other stocks I hold are too expensive for a purchase and I am not willing to pay such elevated price.

Should I accumulate in existing stocks or open a new position?

If I decide to open a new position, what stocks to choose and will I be able to find a stock which would pay me a better dividend than the existing stocks?

 
(MORE: Linn Energy: Swapped LINE for LNCO)
 

To evaluate which stock can give me a better deal per buck, let’s take a look at basic metrics of the existing stocks:
 

Symbol Price Div.
Yield
Div.
Rate
Div.
Growth
# of
Years
P/E
LO $49.26 4.50% $2.20 19.29% 4 15
KMP $80.20 6.60% $5.26 6.24% 16 22
PPL $30.29 4.90% $1.47 1.87% 13 12

 

Are there stocks out there which would provide me with a better yield, growth and safety than those I already own? Would you accumulate or open a new position? If you remember my previous posts I desperately need to boost my income now with higher yielding stocks and reinvest the income into higher growth stocks. But are there stocks which can provide both?

 
(MORE: 17 Top Investors Share Their 2014 Market Insights and Strategies)
 

I went on and checked MLPs if any of the candidates can provide a better yield, growth and low P/E.

I found the following candidates:

 

Symbol Price Div.
Yield
Div.
Rate
Div.
Growth
# of
Years
P/E
SEP $42.13 4.80% $2.01 8.63% 5 26
BPL $69.96 6.00% $4.23 4.30% 17 26
EXLP $29.58 7.00% $2.08 3.68% 5 23
DPM $49.60 5.70% $2.82 3.65% 6 22
TLP $42.68 6.00% $2.59 2.69% 7 23
EPB $34.54 7.30% $2.51 20.09% 4 16
TCAP $28.65 7.50% $2.16 8.62% 1 12
PNNT $11.28 9.90% $1.12 4.04% 5 11

 

These are the stocks I would be interested in if I decide to open a new position. The most appealing seem to be SEP, BPL, EPB and TCAP with great yields, growth and dividend history. I would continue evaluating those stocks further and do some reading as I have time until I will be able to free up money from RWX commission free ETF for a new purchase.

 
(MORE: Optimize Your Asset Allocation)
 

Should I open a new position in one of those high yielding growth stocks or should I stay with the existing one? What do you think?
 




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Trading options is dead dangerous! Really?

Trading options is dead dangerous! Really?

If you received or read a disclosure from your broker about options trading stating that trading options is dangerous and you may lose money, do not believe it. If you know what you are doing and what to expect from options, they can be very safe and they actually can be less dangerous than trading stocks themselves.

Do you believe me? No? Then read the next text.

Meet the new Monster – selling options

A friend of mine sent me a risk disclosure given to him by a broker which was describing a few trading strategies and tools investors can use. A portion speaking about selling options was especially interesting.

All they were saying about selling options was scary and very discouraging. According to them, selling option contracts causes you taking an enormous risk which can wipe out all your money. Although they agreed that this risk can be partially mitigated by owning the underlying security or having enough cash.

 
(MORE: Covered Call Trading Plan Update)
 

Unfortunately such disclaimer is usually very generic and vague. It is aimed to protect the broker and not you, the client. But the primary goal is to scare you so you won’t trade options at all. It is now an industry standard to make a hype around options and mystify them as something a normal investor cannot do at all cost. Per brokers, trading options is something accessible only by rich investors and professionals. The opposite is true. Everybody can trade options and it is in many cases less dangerous than trading stocks.

Under certain conditions, options can be dangerous. For example, you have no clue how to trade them and yet you do it. Or if you decide selling naked calls, you really will be undertaking an enormous risk. But all other basic options strategies such as naked put selling, cash secured put selling, and covered calls are actually less risky than trading stocks themselves.

 
(MORE: Getting Paid To Do Nothing)
 

Why brokers came up with such disclosures scaring potential investors to death? It is because of their risk they undertake when their clients use naked put selling using margin. Then, put selling is not your financial problem, it is the broker’s problem. They do not want you to trade options because they are scared of you, and your options trading. Therefore, they will never tell you the truth but they will keep you in ignorance and scared to death. I will try to explain this later.

Why selling options is not dangerous?

Let’s take a look at the two basic options we have – calls and puts. Then you can do four basic trades with those options:

  1. You can buy a call (long) – bullish
  2. You can buy a put (long) – bearish
  3. You can sell a call (short) – generally bearish, but can be a bullish trade
  4. You can sell a put (short) – bullish

Buying calls risk

When you buy a call option, you speculate that the stock price will grow. What you can lose? You can lose 100% of money you paid for the call contract. In order to make money, the stock price must rapidly rise above the strike price of the call option, otherwise your trade will be a loss. The time value (theta) will destroy your option before it can even make some profit.

Well, not for me.

 
(MORE: Gambling Vs Investing – What’s the Difference?)
 

Buying puts risk

When you buy puts, you speculate that the underlying stock will go down. Same as with the call option, the stock must move rapidly down in order to make you money. Otherwise theta will destroy your put option. During violent bearish markets this trade makes sense to protect your portfolio and your current positions. Otherwise not for me either.

Selling calls risk

And now we are getting into the “deadly dangerous, risky option selling” (as per the above mentioned broker). There are two trades, two strategies with selling calls.
 

  1. naked calls
  2. covered calls

To be honest, naked calls can be very dangerous. How do they work? If you sell a call for a stock, let’s say AT&T (T) at strike price of 34 a share and you do not own the stock, you are undertaking an enormous risk. If something great happens with the company, for example over the weekend they announce a very good news, then the following Monday, the stock may open higher with a gap (for example the stock jumps up from $33 a share to $150 a share over the weekend). you will have no time and no option to fix this trade.

 
(MORE: Limited Partnership (LP) & Master Limited Partnership (MLP))
 

Then you are in trouble. You will be forced to sell 100 shares of the stock (which you do not own) and you would have to go and buy it for $150 a share in order to satisfy the call obligation. The loss can be huge. But who would trade such a trade? If you have no knowledge about options you may open such trade as a mistake. Or you need to be a very skilled trader in order to manage such a trade and avoid problems (usually traders cover such trade with a different option creating all sorts of option spreads, so they do not stay fully naked.

This was the only dangerous option trading I know of. And now lets see the “piece of cake” part.

Covered calls risk

There are yet another two strategies with covered calls. Each may have either a bullish or bearish expectations. The strategies are:
 

  1. total return strategy, or buy-write
  2. partial return strategy

I like the total return or buy-write strategy. How that works? You buy 100 shares of a stock, for example AT&T (T) at 34 a share, and at the same time you sell a call at 36 strike and collect, for example, 1.50 (or $150) premium. Your call contract is covered by 100 shares of the stock from the beginning.

 
(MORE: I’m Confused… )
 

What can happen to you? Two things. If the stock stays below 36 strike, the option expires worthless and you can sell another contract. If the stock rises above 36 a share, your 100 shares of the stock will be called away from you. You will have to sell 100 shares of (T) at 36 (strike) a share. You realize a gain by selling the stock ($3,600 – $3,400 = $200 gain) plus collected premium ($200 stock gain + $150 premium = $350 total return).

As you can see, with selling calls you actually make more money, than trading stock itself.

So where is the risk? The risk is in a situation when the stock drops too low. In that case the loss on the stock side is so large that premiums collected cannot compensate for the loss. But if you happen to own a dividend growth stock how often these stocks drop so low that you stop sleeping well at night?

And compare it to a single stock trading. What is the difference between a stock you bought at 34 a share and it dropped over the weekend to 10 a share because of bad news? The risk is absolutely the same as when owning a short call contract. You are losing money in both cases, but with options you are losing less.

 
(MORE: Retire Before Dad 2014 Financial Goals)
 

The total return covered call strategy is a bullish strategy and works well against stocks you want to buy and sell with gain.

What about the partial return strategy?

This strategy can be either bullish or bearish. If you are bullish, it works the same way as the total return strategy where you write call contracts against the stock you already own (so no stock buy portion) and you want to sell the stock.

If you are neutral or moderately bearish, this strategy can help you collecting premiums (sometimes called another dividend) while you are waiting for the stock to grow and make you capital gain. This works well in sideways markets.

 
(MORE: Dividends Aren’t Evil)
 

The third expectation is If are very bearish and expect the stock to drop significantly. This strategy is a protective strategy and again you write the contracts against stocks you already own.

If you expect the stock to fall down in bearish environment, you may decide to sell a deep in the money covered call. As the stock falls down, the value of the contract is diminishing and eliminating the loss on the stock.

For example, you have a stock (T) which currently trades at $34 a share. The markets are turbulent and you expect the stock to fall to $25 a share where you identified next major support. You sell a long term deep in the money call, for example June, or even January 2015 25 strike call. For such contract you will receive 9.6 or $960 premium. If the stock falls back down to 25 a share, the call option will become worthless and you either buy it back or let expire. You keep the full premium $960, but your stock will show $900 loss. The entire trade protected you and you are about 60 dollars in positive territory.

Where is the risk? The risk is in early assignment. If your expectations were wrong and the stock continues rising, the opposite trader who owns your call may exercise the option early and you may lose money. But that would happen if you originally bought the stock too high or high enough that the collected your premium won’t be able to cover the loss. Otherwise this trade will work the exact same way as total return trade.

 
(MORE: How To Manage Your TSP Like A Stock Professional)
 

Since I am a visual person I like to see charts and numbers to see the whole picture. If you are like me, here is a flow chart how the entire covered call strategy works:

Covered call


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