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Max My Dividends How To Get Maximum Yield On Dividend Stocks For The Rest Of Your Life By Jack Carter Superior Information LLC. ©2014
Max My Dividends
How To Get Maximum Yield On Dividend Stocks For The Rest Of Your Life
By Jack Carter w Superior Information LLC. ©2014
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ALL RIGHTS RESERVED. No part of this book may be reproduced by any means, electronic or otherwise, in any form including: electronic, mechanical, photocopying, recording or by any informational retrieval system. LEGAL NOTICES. While all attempts have been made to verify information in this book, neither the author nor the publisher assumes responsibility for errors, omissions or contradictory interpretations of the subject matter herein. Any slights of people or organizations are unintentional. If advice concerning tax, legal, compliance, or related matters is needed, the services of a qualified professional should be sought. This book is not a source of legal, regulatory or accounting information or advice and should not be regarded as such. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. All users are advised to retain competent counsel to determine what state and or local laws or regulations may apply to the user's particular business. The purchaser or reader of this information and publication assumes responsibility for the use of these materials and information. Adherence to all applicable laws and regulations, governing the securities industry in all aspects of doing business is the sole responsibility of the purchaser or reader. The publisher assumes no responsibility or liability whatsoever on behalf of any purchaser or reader of this material and information. DISCLAIMER. Information illustrated is for educational purposes only. This information is based upon sources believed to be reliable. The author and publisher assume no responsibility for the consequences of anyone acting with this educational information. NO ADVICE IS GIVEN OR IMPLIED. It should not be assumed that the methods techniques or indicators presented will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples are for educational purposes only. This is not a solicitation of any order or an offer to buy or sell stocks or securities of any kind. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown in any example given in this book. No guarantees of income or profits are intended by this book. Many variables affect each person’s results. Your results will vary from examples given. Published By Superior Information LLC. www.superiorinformation.com 303-‐494-‐7099 © 2014 Superior Information llc. All rights reserved.
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Dear investor,
Thank you for getting this guide. Like you, I
invest in dividend stocks and own a few at all
times. Especially when bank yields are low,
dividend stocks have been a great investment
for many people. Plus they are more liquid than
any CD and pay much higher rates.
Before we get into dividend investing and
maximizing yields, let me tell you a little
about myself, and why you should listen to me.
My name is Jack Carter. As of this writing, I
have over 25 years and close to one billion
dollars in trading experience.
That’s not a misprint.
I started in 1984 and traded throughout the
largest up and down market in history.
In fact, I traded over eight million dollars
worth of stock in one day. That was the day I
traded 284,000 shares of ORCL and a few other
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stocks.
I’ve been a stockbroker, a Nasdaq Market Maker,
a professional day trader and a “fast –money”
hedge fund manager.
I’m not telling you all this to impress you ‐
rather, to impress upon you that, when it comes
to stocks and trading, I have successfully done
it all. And I can help you make money using my
experience.
These days I actively trade stocks, options and
dividend stocks in my IRA. Dividend stocks can
be great to buy and hold, trade and use options
with. I even have 1 dividend paying stock that
I buy instead of leaving money in cash in my
account.
To say I love dividend stocks in an
understatement.
Why dividend stocks?
Dividend stocks are a win win!
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With dividend stocks, you have two ways to win:
when the share value rises and when the company
cuts you a dividend check, paying you a portion
of its profits. If the share price rises by 4
percent, and the company pays a 3-percent
dividend, you pocket a 7-percent profit, minus
taxes, of course. (Or you can reinvest your
dividends to buy more shares.)
In addition to providing two ways to win, the
share-price-plus-dividend advantage allows you
to hedge your bet. If share prices fall by 4
percent and the company pays a 3-percent
dividend, you lose only 1 percent of your
investment. Of course, companies can always
choose to slash dividends, so you’re not
completely safe, but you’re often safer than if
you’re relying solely on rising share prices to
score a profit.
Secure a steady stream of income
With most other investments, you don’t realize
a profit until you sell.
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Before you tell a broker to sell, any profit is
a paper profit — you can see it on a statement,
but you can’t spend it or stick it in your
piggy bank.
Dividend stocks are different. Companies pay
out the dividends in cold, hard cash. These
aren’t paper profits that can disappear in a
bear market. Dividends are money in your
pocket, and after they’re paid they can’t be
taken from you.
Companies typically pay dividends on a regular
basis — usually every fiscal quarter (three
months).
Historically, investing in dividend stocks
has proven to be one of the best ways to make
money in stocks.
Here’s a little research you might find
interesting...
Howard Silverblatt, of Standard & Poor’s,
calculates that from 1926 through March 2009,
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reinvested dividends accounted for 44% of the
9.5% annualized return of the S&P 500-stock
index ($INX).
From 1972 through April 2009, dividend growers
returned 8.7% annualized, according to Ned
Davis Research, compared with 6.2% for the S&P
500 and just 0.7% for stocks that paid no
dividends.
Standard & Poor’s defines “Aristocrats” as
stocks that have a 25-year history of annual
increases in dividends.
Aristocrats delivered an average 11.04 percent
return each year from 1990 to 2012 compared to
8.23 percent for stocks overall, according
to Heritage.com.
When dividends are reinvested, you have a
combination of potential growth in stock price
with the compounding effect of reinvesting the
income dividends provide.
Over the long term, this combination can yield
consistently good returns.
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The June 2012 issue of Money magazine reported
on research from Dr. Robert Haugen of Haugen
Financial Systems that “…found that between
1990 and 2011, the steadiest U.S. shares
produced the highest returns while the most
volatile domestic shares lost value.”
A 2008 study found that between 1968 and 2007,
the 100 top-yielding stocks in the S&P 500
returned 13.52% annually versus 10.53% for the
S&P 500 as a whole.
During the market highs of 2014, dividend
stocks were the market leaders. Price
appreciation alone can add significant yield.
The power of dividend growth to help you reach
and sustain retirement
In 2004, Ned Davis released a study showing
that not only do higher-yielding stocks do
better than the market over time, but those
that grow their dividends are the top-
performing stocks of all:
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Dividend Policy
Annual Return 1972-
2004
S&P 500 8.5%
Non-dividend payers 4.3%
Dividend cutters and
eliminators 5.2%
Dividend growers 7.2%
All dividend payers 10.1%
Dividend growers and
initiators 10.6%
These facts prove that you can beat the market
and market your fortune in stocks with a
dividend stock portfolio.
So even if you are a terrible stock picker, if
you just stick to dividend paying stocks,
you’ll do better.
This is interesting information for another
reason. That is, the number 1 problem with
investing in dividend stocks is losing more on
the stock price than you make in dividend
yield.
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If you buy a stock and make 15% per year in
dividends and the stock price goes down 30%,
you lose 15%. It happens all the time.
Investors buy a stock because the dividend is
great then the stock price drops by more than
the dividend and they end up losing money… even
with the dividend.
So it’s good to know that most dividend stocks
hold the share value.
The biggest problem dividend investors make is
losing money the stock price.
The biggest mistake dividend investors make is
buying a stock just because of it’s high yield.
The dividend stocks paying high yields are most
often traps.
What I have discovered in over 30 years of
investing in dividend stocks is this:
If your goal is to get 10% per year from a
dividend stock, you are more likely to get that
from a stock that pays a 5% dividend AND goes
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up in price 5% than you are in buying stock
with a 10% yield.
For maximizing your dividends you want...
Dividends + Price Appreciation
That is the way to maximize your dividends and
that is the foundation for my trading strategy.
Then we add a simple strategy to max our yield
on dividend stocks, I do this by selling
covered calls against the dividend stock I own.
This way, I have three sources of yield...
1. Stock price appreciation
2. Dividends 3. Premium from selling covered Calls.
To make this work, we only want to deal with
dividend stocks that are rising in price when
we find them. This is critical to achieve our
goal of dividends plus stock price
appreciation.
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Here’s a real example…
I used this strategy in my IRA with Coca
Cola, ticker symbol KO.
Let me tell you about my trade.
Because it was my retirement money I
needed a low risk way to make consistently make
small, but measureable returns on my trades…
with very little risk!
In this case, my strategy included these
four things…
Buy A Dividend Stock,
Capture The Dividend,
Max My Return And…
Take Almost No Risk!
I’m going to reveal how to do this step by
step.
So let’s get started.
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Why Coca-Cola?
Because KO has these three things going
for it…
1. It was stable in price. (For my strategy to
work, the stock doesn’t have to go up, it just
has to not drop much.
2. KO pays a dividend to shareholders.
3. KO has options on it.
I was going to buy a stock that paid a
nice dividend, capture the dividend then sell
the stock.
One of the secrets to making this work
stocks with stable stock prices.
And some of the best stocks with stable
prices are dividend stocks.
OK, here’s another great thing about
dividend stocks, you can pick from hundreds
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that pay a dividend yield of anywhere from 2%
to 15% or more per year.
So, not only are dividend stocks stable
and proven to appreciate, they also pay a
dividend to shareholders.
In my case, KO pays about 2.8% per year.
But I didn’t plan on holding it a year, my
strategy was simple
Buy A Dividend Stock,
Capture The Dividend,
Max My Return And…
Take Almost No Risk!
Here’s something important you need to
know. When you invest or trade dividend stocks,
there are special dates you need to know.
I won’t bore you with those now.
But the bottom line is that you can buy a
dividend stock on the last day you need to be
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shareholder so you’re entitled to the dividend.
Then sell it the next day.
My strategy was to buy a dividend stock,
capture the dividend, boost my return and… take
almost no risk.
Step 1: The first thing I did was, I
bought 400 shares of Coca-Cola, ticker symbol
KO.
When you invest in dividend stocks you
also need to know that the market is designed
so you can’t “game the system.”
So what happens is, dividend stocks
usually drop by the amount of the dividend on
the day after the last day you need to own it
to get the dividend.
This prevents traders from using the
“dividend capture” strategy to “game” the stock
market. So most guru’s advise against dividend
capture strategy.
But what I do is different.
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You need to know that what you learn from
me was NOT back-tested in some guys spare
bedroom on his time off, then promoted as a
system.
I trade stocks. I don’t just talk the talk
I walk the walk.
And I put my own money on the line to
prove it works before I teach you to do it.
OK, so back to my trade.
My goal was to buy the stock, capture the
dividend, boost my return and… take almost no
risk.
But like I said, this dividend capture
strategy is rigged NOT to work.
Step 2: My first step was to buy stock to
capture the dividend. My second step was to
take to away almost all the risk of the stock
dropping. So when I bought the 400 shares of
stock at about $65.11, my second step was to
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immediately sell 4 calls against my position.
This is known as a covered call, or a Buy-
write.”
When you sell covered calls you bring in
money. In my case I got about $1.11 for mine.
But the trick here is that I didn’t use
just any option.
My secret weapon in this trade was to use
a “weekly Option”
So on my trade, I was able to buy a
dividend paying stock, KO, catch the dividend
of .47 plus make $1.11 per share buy selling
the call.
Step Three: Plan on getting called out. If
you plan ths ahead of time you can even make
more money. I made a profit of $1.58. That is
the same as 2.3% or 4.6% on margin for about 8
days.
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And because, I bought Coca-Cola (KO) on
this date, I am also going to receive the
dividend of .$47 per share.
My total per share profit is 1.07 (for
selling the call) plus .47 (for the dividend)
for a total of 1.54.
That is the same as 2.3% in a cash account
like your IRA… or a 4.6% on margin for about 7
days.
Here’s a secret: Because I’m using weekly
options instead of monthly options I can make
twice as much per month.
Weird but true. All the weekly call
options are worth at east twice as much as the
same strike priced monthly calls. And with
weekly options, your money isn’t tied up nearly
as long.
Plus you’re money is liquid more often so
you can decide when to be or out of the market.
You have total control.
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That’s just on 1 trade and if you do that…
using any size account… 20 times a year then
you’re making a killing.
You can also set this up to create monthly
income. And you can create this monthly income
for life.
Getting Started
OK, let’s review the criteria we need to make
this work.
We will only use dividend stocks and we’ll
screen them for 3 things…
1. Yield (I like to stay at about 3.5% or
more)
2. Price trend this is key.
3. Has available options to sell.
And any company paying out too much yield is
luring you into a trap.
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Why? Because any company paying out super high
yield is probably going to lose more than that
in stock price. There are some companies out
there offering ridiculous yields to get you to
buy the stock. But their business simply can’t
support an ongoing dividend. So consider most
of those traps.
The other common way to search for dividend
stocks is to look at the payout ratio. This
ratio is the percentage of a company’s net
income that it pays out in it’s dividend. For
example, if a company earned $1.00 per share
and paid out .50 cents in dividends then the
payout ratio is 50%.
It’s nice to know what a payout-ratio is, but
there are problems with this approach.
The problem is that it relies on fundamental
analysis.
I want to share with you a core secret of why
the trading strategy you’ll learn works so
well...
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There are two different ways of approaching the
stock market in terms of looking for a stock to
invest in or trade.
Those two different ways of looking for a
stock are fundamental analysis and technical
analysis. In other words from a “predicative”
view or “reactive” view.
The guys doing fundamental analysis read
tons of stuff. They read all the company press
releases, stacks piled to the ceiling of Wall
Street analyst’s reports (what a joke) from
every brokerage firm on Wall Street.
They read the company’s quarterly earnings
reports (what a lie). Ever read one of these?
These company produced quarterly reports and
annual reports are filled with jargon and
accounting language that nobody can understand
and some of which seems to be totally made up.
Like the “synthetic lease” found in one of
Krispy Kreme Donut’s quarterly reports.
The fundamental analysts read all this
stuff and more, etcetera, etcetera, ad
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nauseum...
From all these piles of crap they come up
with calculations and stock price valuations to
determine if a stock’s price is overvalued or
undervalued and from there they try to
“predict” the stock’s price movement.
Fundamental Analysis Is A Total Waste Of Time!
There are two reasons fundamental analysis
is a total waste of time.
#1. The reason is because you cannot rely upon
any information you get from the company you
are researching or from Wall Street analysts.
Before I found success as a trader I was
trained as a stock broker on Wall Street so I’m
telling you this as an insider –
Company Management’s Job Isn’t To Tell You The
Truth...
It’s To Get You To Like The Stock!
Same thing with Wall Street analysts,
company management blows smoke up their skirt
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and the next thing you know the analyst’s
brokerage firm is issuing a “strong buy”
recommendation.
2. Wall Street brokerage firms have already
been busted for “conflict of interest” when it
comes to recommending stocks. They would issue
“buy recommendations” then talk amongst their
peers and friends about what a piece of shit
the company was.
I’ve said it before and I’ll say it again…
Nobody On Wall Street Cares If YOU Make Money,
They Only Care If THEY Make Money!
You cannot trust any information you get
from a company or from Wall Street! Since you
cannot trust any information from the company
or Wall Street analysts, any time you spend on
fundamental analysis is a complete and total
waste of time.
Besides, all the relevant information is
already built into a stock’s price.
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And... that leads us away from fundamental
analysis, into technical analysis. Technical
analysis is “reactive.” And that’s what I like
about it.
Understand something: I don’t try to
predict anything. I simply react to a stock’s
price movement.
I like to ride trends in a stocks price.
If the stocks price starts moving up, I react
by buying it.
It’s a reactive trading approach and it
all starts with...
Stocks That Are Already Moving Up In Price!
Once you limit yourself to only getting
involved with stocks that are already moving up
in price, you’ll eliminate large losses and
dramatically improve your overall stock market
results.
And, more importantly... you’ll put
yourself in a position to make a large,
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“mortgage payment sized” stock trading profit
in a matter of days.
Stick to this first rule and...
Everything You Do In The Stock Market
Becomes 100% Easier!
And, if applied correctly, this list of
stocks can also put you...
Light Years Ahead Of Every
Other Investor You Know!
In fact, if you were to hold a little
investing challenge with your friends and, just
to make it interesting, you let them have any
competitive advantage in the stock market they
wanted.
Some of them would say they wanted a
recording device inside a CEO’s office.
Others would say they wanted Warren Buffet
as their investment advisor.
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Others would say they wanted carefully
“researched stocks” with stuff like the “lowest
P/E ratio.”
Or the “best bottom line”... or... the
“greatest quarter to quarter sequential
earnings growth”... or... the “largest number
of insider buying.”
Or the Fibonacci, Elliot Wave reversal
with a thousand other technical indicators...
half of which they can’t even pronounce
And despite giving them any competitive
advantage they wanted ...
You’d Still Blow Them Away!
Simply by having a list of stocks that are
already moving up when you find them.
Your biggest short cut to short term
trading success is getting the list of stocks
already moving up in price because...
Once An Object Is In Motion... It Tends To Stay
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In Motion!
Therefore, one way to profit off that
“object in motion” concept as it relates to the
stock market is to start with a list of...
Stocks That Are Already Going Up In Price!
When you confine yourself to trading only
and exclusively stocks that are moving up in
price like the one shown in this chart, you
drastically swing the odds of a profit rich
trade in your favor!
Please do not discount the importance of
what I have just explained to you. This is the
very core of my phenomenal success. This can be
your “secret key” to turning very small trades
into very big trading profits.
To be a successful dividend investor you need
to focus on the trends of dividend stocks more
than the yield. The trend is more important
than the yield.
That last sentence is the biggest secret in
dividend stock investing.
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The trend is critical because it will keep you
out of bad stocks, tell you when to sell, and
make you more money that you ever would on the
dividend alone.
Let me illustrate.
Here is a chart of one of my all time favorite
dividend stocks...
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This is a 1 year chart of a dividend stock that
is on my hot list. As you can see, this stock
has gone from 23 to 36 in 1 year. That is a 56%
return on stock price alone.
Making money on the stock price appreciation
can be significantly more than the dividend
yield.
By the way, the stock in this chart ALSO pays a
dividend yield 4.57%. What a great added bonus.
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OK, think : dividend stocks on the rise!
The next filter I steh yield filer. I hve found
good results with stocks paying as little as
3.4% to as high as 14.4%... but in every case
the stock was already trending higher in price.
So start with a list of stock yielding 4 to 7 %
and go from there.
Next is making sure your stocks have avaiabel
options.
Now we’ll take your list and filter it down
based o on the trend of the stcosk and
selecting the ones in the best trends..
To find dividend stocks to buy on the rise,
we’ll use an eight step process.
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Step 1: First, set up your charts so you can
clearly see the existing trend.
Step 2: Get a list of dividend stocks.
Step 3 Run it through your chart set up
Step 4 Make a list of cherries.
Step 5 Check the dates
Step 6 Check the options
Step 7 Plan you exit Strategty
Step 8: Get in
OK, let me tell you how to do each step.
Step 1: Set Up Your Charts
To clearly see a stock that is already
moving up in price and to spot the best time to
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buy and to know when to sell we’ll use pre set
charts.
This set up will also help us filter
stocks as well.
This way, when you type in a stock symbol,
you can tell in about 2 seconds if it’s a good
stock to trade.
If you already have your online trading
account opened then you already have a charting
capability.
If you don’t have your online account
opened or you plan on calling in your trades
over the phone, then you can use one of several
free charting websites found online.
I set up my charts so that every time I
plug in a stock’s ticker symbol, I see
everything I need to decide if it’s a stock I
would like to trade.
I can see it the stock is in a nice trend
when I find it. And I can see if it has the
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potential to move up in price three or more
dollars per share.
I pre-set my charts to contain a six month
daily bar chart.
The six month view gives me the best
visual read on the stocks trend.
I also like bar charts. They’re easy to
read.
Each bar represents one trading day. The
top of the bar is the day’s highest price the
stock traded at. The bottom of the bar is the
day’s lowest price the stock traded at. The
left hash mark is the price the stock opened at
that day and the right hash mark is the closing
price of the day.
Here’s a close up view of 15 days in bar
chart format…
Put together, day by day, we see a general
trend line. In this example, the trend is up….
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Added to my charts are three technical
indicators.
I use these technical indicators to show
me the short term trend, intermediate term
trend and long term
trend.
The technical indicator I use is called an
“exponential moving average” (EMA).
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For a short term EMA, set the trading
range to be in the range of 9 to 40 trading
days.
For an intermediate trading range use an
EMA based on 40 to about 100 days range.
And for your long term indicator, use
roughly 200
days or more.
The exponential moving average ( EMA ) is
used to show me the direction of the trend and
the stocks current price relative to it’s EMA.
Added to you charts should be daily
volume. Any stock that trades below roughly 500
thousand shares a day should be avoided.
With that set-up, anytime you type in a
stock ticker, you’ll see what you see to pick
up the pattern recognition that leads to profit
rich trades.
Step 2: Get a list of dividend stocks.
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Remember, we don’t want to search for the
highest yield, we want a combination of
dividend plus yield. So to start off, we might
start looking at stocks that pay a 3%-4%
dividend and have a rising price trend.
You can get a list of dividend stocks just by
searching on the internet. To go through this
execercicse, start with a few stocks in the 3%
to 4% dividend yield range.
Step 3 Run it through your chart set up
Start off with a few stocks and look at
each one in your chart set up.
You wantto avoid anything trending down and
stock to stock that are stable to rising.
The stocks that are in better trends also have
better options pricing. This means you get more
when you sell a call options if you paln on
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doing covered calls. ( More on this in a minute
)
Step 4 Make a list of cherries.
OK, after you’ve looked at a few dozen or so
stocks you will make a list of cherries. These
are the dividend stocks that show the most
promise for appreciation.
Now we have a list of dividend stocks that we
can buy.
However, before we buy any dividend stock we
need to go through 4 more steps
Step 5 Check the dates
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Remember, we don’t won’t to get in at the
wrong time. Know the e-date before you buy the
stock.
Step 6 Check the options
If you plan on selling covered calls then
you should take a look at some call options you
could sell and see how much that would add to
you yield.
Step 7 Plan you exit Strategy
OK, so back to your chart, assuming it’s
already in an uptrend when you find it, if you
buy this stock only three things can happen…
1. It can go up. exit - If it is trending
up and it it keeps going up, stay with it.
Even within the context of an uptrend a
stock can goe down for 3 to five days in a
row and not have broken it;’s trend. You
just need to see where support is and as
long as the stock stays above that, stay
with it.
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2. Stay the same. If it stays the same and
you like the dividend yield stay with it. I
own AMLP and it’s pretty flat in price but
pays a nice yield.
3. The stock can drop. If it drops below
support abnd stays below support then sell
it.
Before you buy write down the prices you will
exit the stock.
Step 8: Get in
Buy it at the market.
Now we have a portfolio.
Now we actively manage what we have. If a stock
starts dropping we will sell it and buy
something else or more of the same. Remember,
we don’t want to get too diversified.
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How to boost your returns…
OK, from here, you may want to add options.
This options strategy is best used on stocks
you feel are still in a positive up trend.
Before we get into the strategy, let me tell
you about options...
All About Options...
All About Options.
What I’m going to do here is give you an
understanding of options, then I’ll get into
the difference between monthly and weekly
options.
First thing to understand is that an
option is nothing more than the right, but not
the obligation, to buy or sell a stock for a
specified price on or before a specific date.
That’s all it is.
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An option BUYER owns the RIGHT to buy or
sell a stock at a fixed price until the option
expires. An option buyer pays money to own
those rights.
An option seller owns the OBLIGATION to
buy or sell a stock at a fixed price until the
option expires. An option seller receives money
to take that obligation.
A Call option is the right to buy a stock
at a specific price on or before a specific
date.
A Put option is the right to sell a stock
at a specific price on or before a specific
date.
You can buy options and you can sell options.
You can also sell options you don’t own.
The trader that purchases an option,
whether it is a Put or a Call, is the option
"buyer."
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The trader that originally sells the Put
or Call is the option "seller."
Each option contract is equal to 100
shares of the underlying stock.
There are basically two things you do with
options, BUY or SELL them.
When you buy an option, you are buying the
“right” to buy or sell a stock, on or before a
certain date, (called the expiration date), at
a certain price, (called the strike price).
When you sell (also known as “write”) an
option you are selling the “obligation” to buy
or deliver a stock, on or before a certain
date, (called the expiration date) at a certain
price, (called the strike price).
There are four parts to an option.
1. The TYPE - Put or Call.
2. The UNDERLYING STOCK
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3. The EXPIRATION DATE
4. The STRIKE PRICE
1st Part Of An Option - Type: Puts and Calls
Calls
When investors anticipate a stock’s price
will be rising, they would buy Calls.
When they buy a Call, they are buying the
right to “call” the stock away from someone at
a fixed price, (the strike price) for a fixed
amount of time, until the expiration date
(which is always the third Friday of the
expiration month).
How Does A Call Work?
Let’s say ABCD is a stock trading at 87 per
share on November 15 and an investor thinks
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it’s going to rise by year end. That investor
could purchase the ABCD Dec 90 Calls for $5 per
contract (each contract is equal to 100
shares).
The investor that buys any ABCD Call
option owns the right to call the stock from
the market at 90 per share until the third week
of December.
In our example, December is the expiration
month. That means that on the third Friday of
December this option will expire. All the ABCD
options with a December expiration will expire
on the third Friday of December.
If ABCD does rise, the price of the option
will also rise. The investor can control 100
shares of ABCD by owning 1 ABCD Call contract.
In this case, the investor could control
100 shares of ABCD at a fixed price (the strike
price) of 90 per share for $550. (5.50 per
contract x 100 per contract = $550).
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By comparison, 100 shares of ABCD would
cost $8700. If the stock price of ABCD rises,
the value of this option will also rise. If
ABCD drops in value, this option contract will
also drop in price.
If ABCD shoots up to 110 per share, then
this option will likely rise to around 20.
Think about it, this investor owns the right to
buy ABCD at 90 and it’s trading at 110. He paid
500 bucks for the right to buy ABCD at 90
anytime he wants until the third week of
December.
He can sell that option anytime he wants
between the time he bought it and the time it
expires. Once the third Friday of December
rolls around, this option expires.
Almost all Call buyers sell their Call
options rather that exercise them.
If ABCD starts dropping, then the value of
this option will also drop. If ABCD drops to 83
then there won’t be much value in owning the
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right to buy ABCD at 90 when you could buy ABCD
in the market at 83.
This option will only be valuable if ABCD
is trading over 90 come the third Friday of
December. If ABCD is trading below 90 on the
third Friday of December, then this option will
expire worthless. Think about it, who would
want to pay someone for the right to buy ABCD
at 90 when they could buy ABCD for less than
90?
That’s a Call option.
There are only two kinds of options, calls
and puts. Think “call up” and “put down”.
Now let’s move on to “Put” options.
Puts…
When investors or traders anticipate a
stock’s price will be dropping, they would buy
Puts. (But that’s not what this strategy is
about.)
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When they buy a Put, they are buying the
right to “put” the stock to someone at a fixed
price, (the strike price) for a fixed amount of
time, until the expiration date (which is
always the third Friday of the expiration
month).
When an investor or trader thinks a stock
price will be staying the same or rising, he
would sell Puts and receive money for selling
someone the right to “put” stock to him at the
strike price until the options expires.
How Does A Put Option Work?
Let’s say ABCD is trading at 87 per share
on November 15 and an investor thinks it’s
going to drop by year end. That investor could
purchase the ABCD Dec 90 Puts for 5 per
contract (each contract is equal to 100
shares).
The investor that buys any ABCD Put
option owns the right to “put” the stock to the
market at 90 per share until the third week of
December.
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In our example, December is the
expiration month. That means that on the third
Friday of December this option will expire. All
the ABCD options with a December expiration
will expire on the third Friday of December.
If ABCD does drop, the price of the option
will also rise. The investor can control 100
shares of ABCD by owning 1 ABCD Put contract.
In this case, the investor could control
100 shares of ABCD at a fixed price (the strike
price) of 90 per share for $500 (5 per contract
x 100 per contract = $500). If the stock price
of ABCD drops, the value of this option will
rise. If ABCD rises in value, this option
contract will also drop in price.
Why Does The Value Of The Put Rise If The
Stock Drops?
Because the value in owning the right to
sell ABCD at 90 becomes more valuable as the
stock drops below 90.
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Imagine being able to sell a stock 23
points higher than it’s trading at. That’s what
you would have if you owned the right to “put”
ABCD at 90 if ABCD was trading at 67.
If ABCD drops down to 67 per share, then
this option will likely rise to around 20.
Think about it, this investor owns the right to
sell ABCD at 90 and it’s trading at 67. He paid
500 bucks for the right to sell ABCD at 90
anytime he wants until the third week of
December.
He can sell that option anytime he wants
between the time he bought it and the time it
expires. Once the third Friday of December
rolls around, this option expires. Almost all
Put buyers sell their Put options rather than
exercise them.
If ABCD starts rising, then the value of
this Put option will drop. If ABCD rises to 110
then there won’t be much value in owning the
right to sell ABCD at 90 when you could sell
ABCD in the market at 110.
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This option will only be valuable if ABCD
is trading below 90 come the third Friday of
December. If ABCD is trading above 90 on the
third Friday of December, then this option will
expire worthless. Think about it, who would
want to pay someone for the right to sell ABCD
at 90 when they could sell ABCD for more than
90?
Why Does The Value Of The Put Drop If The Stock
Rises?
Because the value in owning the right to
sell ABCD at 90 becomes less valuable as the
stock rises above 90.
Imagine owning the right to sell the stock
at 90 when it rises to 100.
There is no value in owning the right to
sell a stock at 90 if the same stock is trading
in the market at any price over 90. As that
stock rises over 90, the value in owning the
right to sell at 90 declines.
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OK, that’s the first part, Type: Puts or
Calls
2nd Part Of An Option - The Underlying Stock
Every option has an underlying stock as
it’s root. In our example above, ABCD is the
underlying stock. The price fluctuation of the
underlying stock will cause a fluctuation in
the price of the option.
3rd Part Of An Option - The Expiration Month
Options are only traded until a fixed date
called the expiration date. In our ABCD Dec 90
Put example, the owner of this Put can sell
ABCD at 90 anytime he wants to until expiration
which is the third Friday of December.
4th Part Of An Option - The Strike Price
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Strike prices are spaced 5 points apart on
stocks below 200 per share. Over 200 the strike
price increment changes to 10 points.
With Call options, the strike price is the
price that the Call owner can buy the
underlying stock at. In our ABCD Dec 90 Call
example, the owner of this Call option can buy
ABCD at 90 anytime he wants before expiration.
With Put options, the strike price is the
price the Put owner could sell the stock at
anytime he wants until expiration. There are
strike prices in 5 point increments on every
stock that is optionable.
On the stock of ABCD for example, you can
buy or sell Puts and Calls on ABCD with strike
prices from as low as 20 to 120.
Here are a few more things you need to
know about options…
“”
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The premium is the price of an option
contract, as quoted by the exchange it trades
on. It’s the price that the buyer (holder) of
the option pays to the option seller (writer)
for the rights conveyed by the option
contract.
In our ABCD example, the ABCD Dec. 90 Call
contract is priced at 5. The premium is said to
be 5, which is the same as the price.
Options are said to be in-the-money, at-
the-money or out-of-the-money depending on
where the stock price is relative to the
option’s strike price.
“In-The-Money”
A Call is in-the-money when the price of
the underlying stock is greater than the
option's strike price.
A Put is in-the-money when the price of
the underlying stock is lower than the option's
strike price.
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In our example, the ABCD Dec. 90 Call is
in-the-money anytime ABCD stock is trading at
any price higher than 90.
The ABCD Dec 90 Put is in-the-money
anytime ABCD is trading at any price below 90.
“At-The-Money”
An option is at-the-money if the strike
price of the option is equal to the market
price of the underlying security.
In our example, the ABCD Dec. 90 Call is
“at-the-money” if ABCD is trading at 90 per
share.
The ABCD Dec. 90 Put is “at-the-money” if
ABCD is trading at 90 per share.
“Out-Of-The-Money”
A Call option is out-of-the-money if the
strike price is greater than the market price
of the underlying stock.
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In our example, the ABCD Dec. 90 Call is
out-of-the-money anytime ABCD is trading below
90.
A Put option is out-of-the-money if the
strike price is less than the market price of
the underlying stock.
In our example, the ABCD Dec. 90 Put is
out-of-the-money anytime ABCD is trading above
90.
“Intrinsic Value Of An Option”
The intrinsic value of an option is the
difference between an in-the-money option
strike price and the current market price of a
share of the underlying stock.
In our Call example, the ABCD Dec. 90 Call
would have an intrinsic value of 4 if ABCD was
trading at 94. The ABCD Dec. 90 Call holder
owns the right to buy the stock at 90 and ABCD
is trading at 94 so the ABCD Dec. 90 Call has
an intrinsic value of 4.
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In our Put example, the ABCD Dec. 90 Put
would have an intrinsic value of 4 if ABCD was
trading at 86. The ABCD Dec. 90 Put holder
would have the right to sell ABCD at 90 and
ABCD is trading at 86, so this ABCD Dec. 90 Put
would have an intrinsic value of 4.
“Time Value Of An Option”
Time value of an option is the portion of
the premium that is attributable to the amount
of time remaining until the expiration of the
option contract and to the fact that the
underlying components that determine the value
of the option may change during that time.
Time value is generally equal to the
difference between the premium and the
intrinsic value.
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Three Things That Effect The Price Of An Option
1. The price of the underlying stock relative
to the strike price of the option. Options in-
the-money are priced higher than options that
are out-of-the-money.
2. The time remaining until expiration of the
option. The longer the time left in an option,
the more value it will retain. As options get
closer to expiration, the time decay erodes
their value. We let this price erosion factor
work to our benefit when we spread Puts in the
current month.
3. The volatility of the underlying stock, the
higher the option’s premium will be.
All right, that was quite a bit to digest.
If you want to re-read this section on
what options are, go ahead and do that now.
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The Covered Call Strategy
Here are two options strategies that I like
to profit from using “time decay” to my
advantage.
Let’s cover the first one first…
#1. The Stock Market Cash Cow Strategy:
This is also a way to have money from the stock
market hit your account today or tomorrow.
It’s a hellacious strategy because it puts
the “Time Decay” factor on your side.
And, since most people already own some
stocks, this is something you can start now.
Here’s how to get started…
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Log on to your account and check your
stocks.
Click on whatever “options” link is
provided by your online broker.
If you don’t have an online broker yet you
can get options quotes at
http://finance.yahoo.com. Just type in the
stock symbol where it says “Get Quotes”, then
look around the screen and you’ll see a link
that reads “Options”, if you click that link
you’ll see all the quotes for all the puts and
calls for that stock. Here’s a real example.
These are the August Calls for the stock of
Titanium Metals.
Strike Symbol Last Chg Bid Ask Vol Open
Int
17.50 TIEHW.X 15.10 0.00 17.00 17.30 10 10
20.00 TIEHD.X 14.90 3.60 14.70 15.00 10 2
22.50 TIEHX.X 11.40 0.00 12.40 12.70 5 7
25.00 TIEHE.X 10.60 1.10 10.30 10.50 5 91
30.00 TIEHF.X 6.60 0.70 6.40 6.60 282 546
35.00 TIEHG.X 3.50 0.31 3.50 3.70 317 1,144
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40.00 TIEHH.X 1.65 0.20 1.65 1.75 120 1,152
45.00 TIEHI.X 0.70 0.10 0.70 0.80 64 369
50.00 TIXHJ.X 0.25 0.00 0.25 0.35 14 75
70.00 TIXHN.X 0.05 0.00 N/A 0.05 315 340
75.00 TIXHO.X 0.05 0.00 N/A 0.05 15 15
Ok, let’s say you recently purchased 500
shares of TIE at around 30 per share and today
the stock price is at $34.62.
And looking at the option’s prices, you
decide to sell 5 TIE Aug 35 Calls at $3.50 for
$1750.
From here three things can happen. The
stock goes up. The stock stays the same. Or,
the stock goes down.
Let me break it down for you…
• TIE goes up in price past 35 and you get
the stock called away form you at 35. If
this happens, you get to keep the 1750 you
got for selling the calls and you get an
additional profit of $5.00 per share on the
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stock because you owned it at 30 and it’s
getting called away from you at 35. This is
an additional profit of $1500. In this
case you make $3250 for “renting” out your
stock for about 2 months. Total return
here is 21% in a cash account or 42% in a
margin account.
• TIE stays in a narrow price range around 30
and you don’t get the stock called away.
In this case, you make $1750 just for
renting your stock to the stock market.
• TIE drops in price. In this case your
breakeven price is 30 minus the 3.50 call
you sold for a breakeven price of $26.50.
If TIE drops below that you start losing
money.
OK. So if you want to see money from the
stock market hit your account right now?
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Check your stocks and see if there are any
big fat juicy call options you can sell against
stock you already own.
And even if you don’t already own any
stocks, you can always find a stock you like
then buy it and sell a call option on it at the
same time. It’s generic name is a “Buy-Write”
strategy. You’re buying the stock and writing
the call.
Some people do nothing but this strategy.
As a strategy, “Covered Calls” are one of
the best, most pure, predictable, easily
managed, "cash flow" trading strategies in
today's market.
In fact, they are so profitable that a lot
of people are catching on and using this
approach to generate monthly income.
Retired people, stay at home moms,
executives and part time and full time traders
from all walks of life can profit from this.
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Here are three reasons people love it…
Predictable -
Because you can determine in advance
what the returns will be, based on your
own assumptions.
Easily Managed -
Because you only need to do a few
trades at the beginning of each cycle
and monitor them the rest of the month.
Cash Flow-
Because when you sell an option, the
cash is in your account the next day!
We “cash flow” the market by setting up
covered calls to generate cash every
month.
Here’s another example. It’s not from a
real stock but it will help you get the
concepts and put this into action…
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Let’s say you like ABC company and you
already own or you buy 1000 shares of ABC Co.
at 9.50 per share at the end of January. ABC
Co. is a little volatile at times, so the
premium will be rather large.
You check the option’s quote and the ABC
Feb. 10 calls are quoted at $1.00 bid and
offered at $1.25. You would enter an option’s
order to sell 10 of the ABC Feb $10 calls for
$1.00 each and bring in $1000.00 cash (minus
commissions).
Here you have sold someone the right to
call the stock away from you at $10.00 per
share ( which you already own at $9.50 per
share ) until the 3rd Friday in Feb. in
exchange for $1000.00 cash. This is a covered
call because you already own 1000 shares of ABC
before you sell the calls. So if you have ABC
called away from you at 10 you’re “covered”
because you own the stock.
You buy the stock first. Then sell the
calls options. Buy the stock in increments of
100 and sell the options accordingly.
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Remember 1 option contract = 100 shares of
stock, so if you buy 300 shares of ABC you
would sell 3 call contracts.
Once you’re in the trade only, two things
can happen, you’ll get “called out” of the
stock or you won’t.
If You Get “Called Out”…
If the stock goes over $10.00 by the third
Friday of Feb., you would probably have the
stock called away from you. In this case, you
would have the stock called away at $10.00 and
you would make .50 profit per share or $500.00
and get to keep the premium you received for
selling the calls, which is $1000.00 for a
total of $1500. $1500 divided by $9500 equates
to a return of 15.7%.
Not bad for one month.
Annualized that’s 188.4%.
You can double your return simply by buying
the stock on margin.
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If you buy the ABC stock on margin, it
would cost $4750 to buy 1000 shares of ABC at $
9.50. Selling 10 calls for $1.00 per contract
(100 shares) brings you $1000.00 and getting
called out at $10.00 per share creates another
.50 per share profit on the stock. Total return
now is $1000.00 plus $500.00 = $1500, divided
by $4750 equals 31.5% return for one month.
Annualized that’s 378% per year.
If You Don’t Get Called Out Of The Stock…
You now own 1000 shares of ABC at $9.50.
You’ve sold 10 contracts of the ABC Feb $10.00
strike price calls for $1.00 each bringing in
$1000.
By the third Friday of Feb, if ABC is
trading at $9.62, you won’t get called out, the
options expired worthless, and you will still
get to keep the $1000.00. Total return here is
10.5% for one month.
Annualized that’s 126%.
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If you don’t get called out, you have the
same 1000 shares of ABC to sell a call against
for the next month, and now your cost basis is
down to $8.50 per share because of the $1.00
you brought in from selling the Feb 10 calls
that expired worthless.
HOW TO FIGURE YOUR RETURNS…
To figure your returns, you take the
execution price you sold the option at and
divide it by the stock price.
If you buy the stock on margin, you would
take the execution price of the call option you
sold and divide that by half of the stock price
(since that is all you had to put up to buy the
stock.)
If you get called out. - Take the strike
price (which will be the price you will have
the stock called away), minus the purchase
price (half the purchase price if you bought
the stock on margin) plus the option premium
you received divided by the purchase price, (or
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half the purchase price if you bought the stock
on margin).
To get the exact return, you must subtract
commissions and margin interest.
Management Strategy
The upside always looks great but we also
need to pay attention to the downside if we’re
going to be professional about it.
Let’s not always assume the best. Let’s be
practical and realistic and acknowledge that
this might not work great all the time.
What do you do if the stock starts to go
down?
Well you can’t sell the stock because then
you would have a “naked” call, that has
unlimited risk so your brokerage firm probably
won’t let you do it.
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In this case, if the stock has dropped to
your risk tolerance parameter, you buy back the
call and make a profit on it, and then
immediately sell the stock for a loss.
If you are buying back the option for a
gain and selling the stock for a loss, it
should be a wash.
Don’t let the stock drop by more than you
received in option premium.
The shorter time you sell calls against the
stock, the greater the likelihood that the
calls will drop by a larger percentage than the
stock.
In trading, anytime you can put yourself in
a position where, if you lose, you break even
and, if you win, you win big, you will come out
way ahead. That is to say that if your downside
can be managed to Zero and your upside is 98%
annualized, then even if you’re right HALF the
time, you’ll be a big winner.
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This is especially true during the month
that options expire, they tend to melt like an
ice cube in the summer sun.
If the stock is volatile, you can sometimes
buy the option back when the stock drops and
sell the option again at a higher price when
the stock goes back up.
If you can do this two or three times in
one month, you’re really generating serious
cash flow.
A Note about Option Premiums
Option premiums are higher the further out
in time you look.
The reason for this is because the time
value is still a big factor.
Option buyers like to “buy some time” with
their options, when buying either puts or
calls, in case they’re wrong.
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Figuring that having some time on their
side might turn a losing option’s position into
a winning options position is the main reason
that time value represents a larger percentage
of an option with a longer expiration.
Option premiums are also higher in the more
volatile stocks.
Ok, so what does that mean?
Well it means that the price of the call
option compared to the underlying stock is
higher than ever.
Another way to look at it is in terms of
the call price as a percentage of the stock
price. If you have a $10 stock with options at
$1.00 per contract, the option premium ($1.00)
is 10% of the stock price.
So, if you bought the stock at 10 and sold
the call option for $1.00, you would make a 10%
return on your investment.
That is based on 3 assumptions:
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1. You get "called out" of the
stock at 10
2. You bought the stock in a cash
account
3. The % returns are calculated
before commissions
If you bought the stock on margin,
you would have only had to put up $5.00 per
share and selling the call for $1.00 now
becomes a 20% return.
When you sell a call, you are selling
the call buyer the right to buy the stock from
you at a fixed price (strike price) for a fixed
amount of time (expiration) for a certain price
(option price).
OK, now let me tell you an amazing thing
about doing covered calls using WEEKLY options:
You can double your returns on covered calls
simply by selling 4 weekly calls rather than 1
monthly call.
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This strategy is the most basic and most widely
used strategy combining the flexibility of
listed options with stock ownership.
The covered call offers limited protection
from a decline in price of the underlying
stock and limited profit participation with
an increase in stock price, it generates
income because you get to keep the premium
received from writing the call.
At the same time, the investor can
appreciate all benefits of underlying stock
ownership, such as dividends and voting
rights, unless he is assigned an exercise
notice on the written call and is obligated
to sell his shares.
The covered call is widely regarded as a
conservative strategy because it decreases
the risk of stock ownership.
I use this strategy in my IRA with Coca
Cola, ticker symbol KO.
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(Disclosure: I’m probably long KO as you
read this.)
Let me tell you about my trade.
Because it was my retirement money I
needed a low risk way to make consistently make
small, but measureable returns on my trades…
with very little risk!
In this case, my strategy included these
four things…
Buy A Dividend Stock,
Capture The Dividend,
Max My Return And…
Take Almost No Risk!
I’m going to reveal how to do this step by
step.
So let’s get started.
Why Coca-Cola?
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Because KO has these three things going
for it…
4. It was stable in price. (For my strategy to work, the stock doesn’t have to go up, it just
has to not drop much.
5. KO pays a dividend to shareholders.
6. KO has options on it.
I was going to buy a stock that paid a
nice dividend, capture the dividend then sell
the stock.
One of the secrets to making this work
stocks with stable stock prices.
And some of the best stocks with stable
prices are dividend stocks.
OK, here’s another great thing about
dividend stocks, you can pick from hundreds
that pay a dividend yield of anywhere from 2%
to 15% or more per year.
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So, not only are dividend stocks stable
and proven to appreciate, they also pay a
dividend to shareholders.
In my case, KO pays about 2.8% per year.
But I didn’t plan on holding it a year, my
strategy was simple
Buy A Dividend Stock,
Capture The Dividend,
Max My Return And…
Take Almost No Risk!
Here’s something important you need to
know. When you invest or trade dividend stocks,
there are special dates you need to know.
I won’t bore you with those now.
But the bottom line is that you can buy a
dividend stock on the last day you need to be
shareholder so you’re entitled to the dividend.
Then sell it the next day.
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My strategy was to buy a dividend stock,
capture the dividend, boost my return and… take
almost no risk.
Step 1: The first thing I did was, I
bought 400 shares of Coca-Cola, ticker symbol
KO.
When you invest in dividend stocks you
also need to know that the market is designed
so you can’t “game the system.”
So what happens is, dividend stocks
usually drop by the amount of the dividend on
the day after the last day you need to own it
to get the dividend.
This prevents traders from using the
“dividend capture” strategy to “game” the stock
market. So most guru’s advise against dividend
capture strategy.
But what I do is different.
You need to know that what you learn from
me was NOT back-tested in some guys spare
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bedroom on his time off, then promoted as a
system.
I trade stocks. I don’t just talk the talk
I walk the walk.
And I put my own money on the line to
prove it works before I teach you to do it.
OK, so back to my trade.
My goal was to buy the stock, capture the
dividend, boost my return and… take almost no
risk.
But like I said, this dividend capture
strategy is rigged NOT to work.
Step 2: My first step was to buy stock to
capture the dividend. My second step was to
take to away almost all the risk of the stock
dropping. So when I bought the 400 shares of
stock at about $65.11, my second step was to
immediately sell 4 calls against my position.
This is known as a covered call, or a Buy-
write.”
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When you sell covered calls you bring in
money. In my case I got about $1.11 for mine.
But the trick here is that I didn’t use
just any option.
My secret weapon in this trade was to use
a “weekly Option”
So on my trade, I was able to buy a
dividend paying stock, KO, catch the dividend
of .47 plus make $1.11 per share buy selling
the call.
Step Three: Plan on getting called out. If
you plan ths ahead of time you can even make
more money. I made a profit of $1.58. That is
the same as 2.3% or 4.6% on margin for about 8
days.
And because, I bought Coca-Cola (KO) on
this date, I am also going to receive the
dividend of .$47 per share.
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My total per share profit is 1.07 (for
selling the call) plus .47 (for the dividend)
for a total of 1.54.
That is the same as 2.3% in a cash account
like your IRA… or a 4.6% on margin for about 7
days.
Here’s a secret: Because I’m using weekly
options instead of monthly options I can make
twice as much per month.
Weird but true. All the weekly call
options are worth at east twice as much as the
same strike priced monthly calls. And with
weekly options, your money isn’t tied up nearly
as long.
Plus you’re money is liquid more often so
you can decide when to be or out of the market.
You have total control.
That’s just on 1 trade and if you do that…
using any size account… 20 times a year then
you’re making a killing.
81
You can also set this up to create monthly
income. And you can create this monthly income
for life.
