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The questions have been rolling in this week.
Last week I talked about reliable income from a place you haven’t looked. It’s simple, real and more importantly, a great source for driving income on a monthly basis.
There are so many advantages to using this simple strategy to buy stocks you want to own. Again, it’s a safe and reliable way to bring in income, but some investors simply use the strategy to lower the cost basis of their stock. Either way, it’s a strategy that every investor should incorporate in their quest to grow wealth.
So why aren’t more investors selling puts?
Quite simply, most “experts” in the financial media think this kind of investment is too risky or complicated for the average investor. And frankly, there’s no money in it for brokers, money managers or anyone else in the financial services industry. Once you learn how to use this strategy, you’ll begin to see the world of finance differently. Instead of “paying” people to invest your money, you are paid to invest.
The first key to selling puts safely and profitably is knowing the real risks in owning a company’s shares. We need to assure ourselves the companies we sell puts on are fundamentally sound.
For example, take Altria (NYSE: MO).
It’s a stock that we feel comfortable owning for the long haul mostly due to its unwavering quest to please shareholders. The company continually buys back stock and pays a healthy dividend of 5.0%.
The stock is currently trading around $35 – near a 5-year high.
In my opinion, the price is a little inflated. So I prefer to pay $33.
Remember when I said we want to be paid to be investors? Well, given our desire to own Altria at $33 – we can get paid. Think about that: we can get PAID to agree to buy a stock at our preferred price.
I don’t want to get into the details in this short column, but we can sell one put contract that gives us the right to buy 100 shares of Altria at $33 a share – and collect an immediate $32 for a 4.8% return in just over a month.
(I made a similar trade in GDX for my High Yield Trader subscribers last month and made more than 6% … at a time the ETF price was plummeting.)
And no matter what happens, we get to keep that $32. If Altria stays above $33 – the $32 we collected is ours.
But for the sake of understanding, we should examine the alternative – Altria closing below $33 by option expiration.
In that case we'd keep the $32 and be forced to buy Altria stock at $33 per share.
In this case, we’d actually own the stock for $32.68 per share – that's the $33 strike price minus the $0.32 premium. That 7.07% less than Altria’s current market price.
The important thing to remember is that if the stock trades below $33 by option expiration, you become a shareholder just like everyone else … but at a discount.
Plus you get the dividend of at least $176 per 100 shares during the following year.
In essence, you'd receive $176 plus a minimum of $32 (in most cases significantly more) on a $3,300 investment. This works out to at least 6.3% on your money.
To me, this safe 6.3% return is superb given the current yields on bonds and other “safe” investments. And my simplified example doesn’t assume that Altria will boost the dividend within the next year.
One other thing to mention … had you purchased Altria stock, I would recommend selling a set of calls against your new stock position. This would boost the immediate income of the overall trade … but let's not jump too far ahead. I want to save this for my upcoming webinar, when I’ll discuss all of this in detail.
I had to skip over some important details due to the length of this daily letter. But if you’re interested in hearing more, click here for full details.
Kindest,
Andy Crowder